experts: real estate column Wednesday, April 10, 2002

Worldwide, the house-price boom has arrived

The most underreported number is the increase in house prices worldwide.

By Ozzie Jurock

This article appeared in The Vancouver Sun on April 6, 2002

The most underreported number is the increase in house prices worldwide. In several of my seminars and in my newsletter to subscribers I have argued for years that a 30% price increase on average in the United States (1996 to 1999) and a 27% increase in all developed countries (except Germany and Japan) during the same period is a phenomena that will happen in BC as well. We also argued that the reason that house prices are not covered in inflation indexes in North America is that the US has tied its entitlement payments to the official rate of inflation. Thus to keep payments low, the US official inflation rate 'hovers' around 1.5%. Similarly in Canada we do not report increased values in used home prices. (In the US even the price increase of oil is actually reported over a 15-year period). So, why does it matter that house prices are increasing worldwide? Well, clearly it is of great importance, because if it is a worldwide phenomenon - one in which we in BC to date have not participated in - it is more than likely to happen here as well.

Well, last month a world-renowned egghead magazine The Economist sported this headline: "Our new house-price survey shows that dearer homes have held the world economy aloft". The article goes on to say that house prices WORLDWIDE are rising and rising in most parts at the HIGHEST CLIP EVER (US, SPAIN, IRELAND) and in all other parts at almost record pace only achieved briefly once in the past (BRITAIN, NETHERLANDS, AUSTRALIA). Indeed, not real news to JREI subscribers. We have argued for years that we have an unreported inflation in house prices WORLDWIDE. What is news is that The Economist says so. (Time to sell?)

The fine magazine goes on to say that ... "over the past year average house prices in America have risen by 9%, their fastest-ever in real terms. Prices in Britain rose by 15%. Adjusting for inflation, this is the biggest real increase on record in America, although American households as a whole have more of their wealth in equities than in housing, a relatively few rich people hold the bulk of the shares."

When one considers that ... "housing accounts for as much as 30-40% of total household wealth in Western Europe and almost 25% in America," and that ... "recent studies show that in most countries changes in house prices have a bigger impact on consumer spending than do equity prices." It is clear that what is relevant worldwide will be relevant in BC as well and soon.

If you buy into the argument, that we have lagged first the world and then the rest of Canada (as in Toronto, Calgary, Edmonton even Montreal) then clearly you should take a good hard look at the Vancouver and rest of BC housing. Because to the extent that we collectively have confidence (see previous Vancouver Sun story on confidence) to that extent real estate will keep on rising.

Adds The Economist: "...Our indices show that it is not only America that has been enjoying a house-price boom. In countries from Britain and Australia to France and Spain house prices have been rising at their fastest pace in real terms since the late 1980s' boom.... Massive monetary easing by central banks has succeeded in propping up consumer spending around the world, partly by boosting house prices."

They must have been reading our forecasts.

House price increases
1980 - 2001 % change - Nominal 2001 % change nominal
Spain 726% 15.4%
Ireland 451% 14%
Britain 389% 10.5%
Netherlands 181% 8.7%
Belgium 140% 5.6%
USA 158% 8.6%
Japan 52% -4.1%
Canada 152% 2.7%
Global Index 148% 5.4%

Remember The Economist goes back to 1980 to report and adjusts the price indices for inflation.

Thus in our view it understated Toronto's average price increase in 2001 to have been only 2.4% price increase in nominal terms and at 0.1% loss in real terms. (Tell that to a consumer of a $220,000 house in Toronto who saw the average soar to $260,000 last year, that there has been a 0.1% decline in 'real' terms.) It is a great comparison however. The survey shows price increases in Dublin (9.2%), Madrid (15.2%), New York (8.4%!), London (9.3%), Sydney (13.1%) in real terms with only Tokyo down (-5.8%) and Toronto (?).

Major Point: The world is inflating its real estate across the board - the increase in unabated - in fact gathering speed. While The Economist comes to the wimpy conclusion, that "House prices have saved America and the world from a deep downturn, but they do not remove the need for consumers to take care over their balance sheets. Homes are only as sound as their foundations." I see it clearly as underreported inflation at work. As we have said for the whole year at this spot: "Stay with hard assets, stay with real estate, stay the course ... and lucky you, most of BC has still not recovered to 1995's prices.

Ozzie Jurock is the publisher of Jurock's Real Estate Insider an independent real estate advisory service. You can reach him at 604-683-1111 or e-mail ozzie@jurock.com




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