Nice article. The one item excluded in the analysis is the fact that real estate is the one asset that already has a “wealth tax”, where the municipality taxes the value every year. In the Northeast, depending on one’s area, that annual wealth tax has increased from about 1pct to anywhere between 2-4pct. This confiscates a portion of home price appreciation, as it makes the house less affordable to a buyer. It is also a major drag on housing vs other areas of the country less reliant on real estate taxes for funding.
Housing owned outright appreciates, creating the illusion of wealth. Housing owned with a 30 year mortgage at fixed negative real interest rates builds real wealth. There are 8 different kinds of leverage in a conventional mortgage. Can you identify them all? It’s very important to look at the liability side of the equation.
Thanks Alf for the real estate article. Does this illusionary wealth creation in real estate continue for ever? I thought the demographics wasn't working in real estates favour. In Toronto we used to have approximately 7 year boom and bust cycles probably because of demographics. Other possible factors contributing to price increases include boomers contributing downpayment to their adult kids, foreign investing( with or without money laundering).
Interesting article. What do you think of all the ESG regulations that might come for house owners? (E.g. less good insulated house owner have to pay some taxes, call to install better heating systems,….) Those regulations in the future might make real estate more expensive for buyer and for owner.
Instead of just looking at housing starts to population growth, maybe look only at the percentage of the population growth that can actually afford the higher housing costs, as everyone else is irrelevant. If a growing population cannot afford to buy or rent - they stay home with parents, or they group together to buy/rent. So a fast population growth could actually skew the numbers?
When purchasing my home in 2020, the closer told me that the predominant factor in home buying activity over her 20 year career was unemployment rates. I think this structural factor is overlooked quite often. Plain and simple, you can't get approved for a mortgage without a job. While it's interesting to consider the macro level, on a micro level, having a job is significantly more important than prevailing mortgage rates to the average person. Something like 70% of Americans don't even understand the Fed and how interest rates work. It's hard to imagine a family staring at their Bloomberg terminal waiting for the 10 year to drop...
If you trend the 10Y from 1980 to the present, it looks like it will trend to 0% between 2030 and 2035. Do you think this will be the real estate "peak", or will we see negative rates?
Al, if your comparison of housing pricing to a 30 year bond is true, isn't the FED the marginal buyer in the market by buying MBS securities through QE? I think it holds true, that an MBS security is the bond you describe in your article and the FED has been buying those.
Thank you for sharing, Alf. I'm hoping to get your thoughts on my observations working in the "luxury" >$1m residential real estate markets in the US over the last decade. After all, the table stakes in several cities and destination towns are $1m+. While many of my clients have very high incomes, regardless of their source of income, the bulk of their wealth is in public and/or private equities. It has seemed to me like their home purchases and therefore the home values are largely driven by stock prices. For example, many luxury home markets saw a drop in demand and pullback in prices starting in mid 2018, which appears to coincide with reduced equity valuations. It was the first time in several years that luxury homes traded at a discount to their previous purchase price 2-3 years prior. Fast forward to 2021, and a constant rational that I've heard from eager home buyers is that their net worth had nearly doubled since 2019. You mentioned that real estate values perpetuate the wealth illusion, but my observation is that it may actually be the other way around. Am I'm seeing causation where there is only correlation?
You mentioned that low mortgage rates and high leverage fuel the real estate appreciation. I don't disagree, but to add to that point, it is staggering how many people I have transacted with across the price spectrum from $500k-$20m+ who make all-cash offers (typically their proof of funds includes a sizable stock portfolio) but obtain as much financing as possible. Often they can easily afford to pay all-cash, but finance due to the difference between mortgage rates and their rate of return, which may actually be one of their reasons for buying the home. Again, stock prices factor into the equation.
As a side note, this seems to create a problem for would-be buyers who have lower income / wealth as they get crowded out of their market by the high net worth individuals who easily outcompete to absorb the supply. Call it a "trickle down" effect or gentrification, it seems to me to be driven by the demand side, which seems to be driven by the wealth affect of increasing stock prices.
Thanks again Alf. You make a complicated subject easy to understand. Is the situation similar in Australia (my home) as the market is white hot at the moment on the east coast especially?
Hi Alf, thank you for your article! As usual great work. There are some factors that will impact the long-term bullish trend and I don’t speak about demographics. Living in Paris, I observed that, during the last 3 years all prices rose for small units, 40m2 to 70m2 and we are talking about a 20 to 30% increase !!! Except for larger apartments …. We had a decline of about 3 to 5% in prices caused by lack of buyers in the city center. Moreover, there is not so much interest in apartments which starts at 1,5 M Euro+. So I think the market will rise overall but at some point, money from small buyers will flow into other assets caused by a too big entry for them…
Nice article. The one item excluded in the analysis is the fact that real estate is the one asset that already has a “wealth tax”, where the municipality taxes the value every year. In the Northeast, depending on one’s area, that annual wealth tax has increased from about 1pct to anywhere between 2-4pct. This confiscates a portion of home price appreciation, as it makes the house less affordable to a buyer. It is also a major drag on housing vs other areas of the country less reliant on real estate taxes for funding.
Housing owned outright appreciates, creating the illusion of wealth. Housing owned with a 30 year mortgage at fixed negative real interest rates builds real wealth. There are 8 different kinds of leverage in a conventional mortgage. Can you identify them all? It’s very important to look at the liability side of the equation.
https://www.amazon.com/Homeowner-Wealth-Formula-Daniel-Amerman/dp/1736117505
Thanks Alf for the real estate article. Does this illusionary wealth creation in real estate continue for ever? I thought the demographics wasn't working in real estates favour. In Toronto we used to have approximately 7 year boom and bust cycles probably because of demographics. Other possible factors contributing to price increases include boomers contributing downpayment to their adult kids, foreign investing( with or without money laundering).
Interesting article. What do you think of all the ESG regulations that might come for house owners? (E.g. less good insulated house owner have to pay some taxes, call to install better heating systems,….) Those regulations in the future might make real estate more expensive for buyer and for owner.
Love it - very clear explanation and great analysis
Another great piece, thanks Alf! 🙏🏻
I just recently found you on youtube
Easily one of my top favorite macro thinkers
Keep up the impressive work
Instead of just looking at housing starts to population growth, maybe look only at the percentage of the population growth that can actually afford the higher housing costs, as everyone else is irrelevant. If a growing population cannot afford to buy or rent - they stay home with parents, or they group together to buy/rent. So a fast population growth could actually skew the numbers?
When purchasing my home in 2020, the closer told me that the predominant factor in home buying activity over her 20 year career was unemployment rates. I think this structural factor is overlooked quite often. Plain and simple, you can't get approved for a mortgage without a job. While it's interesting to consider the macro level, on a micro level, having a job is significantly more important than prevailing mortgage rates to the average person. Something like 70% of Americans don't even understand the Fed and how interest rates work. It's hard to imagine a family staring at their Bloomberg terminal waiting for the 10 year to drop...
What is your analysis of the demographic trends? I would have thought that the aging population would require less housing per capita, not more.
If you trend the 10Y from 1980 to the present, it looks like it will trend to 0% between 2030 and 2035. Do you think this will be the real estate "peak", or will we see negative rates?
Al, if your comparison of housing pricing to a 30 year bond is true, isn't the FED the marginal buyer in the market by buying MBS securities through QE? I think it holds true, that an MBS security is the bond you describe in your article and the FED has been buying those.
So, due to the decrease in population size the rates has to decrease to keep up with the growth.
Can decreasing population result in less interest in the buy side in the long term?
Thank you for sharing, Alf. I'm hoping to get your thoughts on my observations working in the "luxury" >$1m residential real estate markets in the US over the last decade. After all, the table stakes in several cities and destination towns are $1m+. While many of my clients have very high incomes, regardless of their source of income, the bulk of their wealth is in public and/or private equities. It has seemed to me like their home purchases and therefore the home values are largely driven by stock prices. For example, many luxury home markets saw a drop in demand and pullback in prices starting in mid 2018, which appears to coincide with reduced equity valuations. It was the first time in several years that luxury homes traded at a discount to their previous purchase price 2-3 years prior. Fast forward to 2021, and a constant rational that I've heard from eager home buyers is that their net worth had nearly doubled since 2019. You mentioned that real estate values perpetuate the wealth illusion, but my observation is that it may actually be the other way around. Am I'm seeing causation where there is only correlation?
You mentioned that low mortgage rates and high leverage fuel the real estate appreciation. I don't disagree, but to add to that point, it is staggering how many people I have transacted with across the price spectrum from $500k-$20m+ who make all-cash offers (typically their proof of funds includes a sizable stock portfolio) but obtain as much financing as possible. Often they can easily afford to pay all-cash, but finance due to the difference between mortgage rates and their rate of return, which may actually be one of their reasons for buying the home. Again, stock prices factor into the equation.
As a side note, this seems to create a problem for would-be buyers who have lower income / wealth as they get crowded out of their market by the high net worth individuals who easily outcompete to absorb the supply. Call it a "trickle down" effect or gentrification, it seems to me to be driven by the demand side, which seems to be driven by the wealth affect of increasing stock prices.
Would love to get your thoughts. Thank you.
Thanks again Alf. You make a complicated subject easy to understand. Is the situation similar in Australia (my home) as the market is white hot at the moment on the east coast especially?
Hi Alf, thank you for your article! As usual great work. There are some factors that will impact the long-term bullish trend and I don’t speak about demographics. Living in Paris, I observed that, during the last 3 years all prices rose for small units, 40m2 to 70m2 and we are talking about a 20 to 30% increase !!! Except for larger apartments …. We had a decline of about 3 to 5% in prices caused by lack of buyers in the city center. Moreover, there is not so much interest in apartments which starts at 1,5 M Euro+. So I think the market will rise overall but at some point, money from small buyers will flow into other assets caused by a too big entry for them…