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I could imagine a feedback loop where anything that boosts wages boosts housing prices, as sellers and landlords try to capture that value. So a labor shortage, a minimum wage hike, that kind of thing. Then the labor shortage ends and wages slow down, but housing stays expensive.
What I don’t get is what actually triggers an asset price correction. How does the market stay, apparently, uncorrected, and why does it stop? Why can’t houses depreciate without an apocalyptic event?
If houses depreciate significantly it crushes bank loans and mortgage backed securities basically making them worthless. This caused the 2008 crisis.
If most people put 20% or less on their mortgage, and the price of houses goes down >20%, they own zero equity and will just walk away, not pay loans, and hand the keys to their lender. Now it’s the banks problem and a brewing financial crisis.
If they depreciate significantly, sure, but as @The_Nybbler said they can depreciate in real terms without a collapse as happened many times before (most notably in the first half of the twentieth century, even in countries where housing stock wasn’t physically damaged by war like Sweden, Switzerland, the US and some parts of Canada).
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For most people, housing is by far the most important investment they own. So they’ll do anything rather than sell their house at a lower price than they bought it.
A friend inherited a house and selling that house has become the centre of their life for years now. They’re convinced that if they just hold on, the price will return to what it was 5 years ago. Taking out loans to pay inheritance taxes, whatever. Anything to get the price from ‘nice income boost’ back to lottery money.
Is your friend my father? After all the kids left the nest, my father divorced my mother to move in with his aging dad with a large house in Southern California. He took care of my grandpa and the house until my grandpa passed away, and is now trying to keep the house value up and sell it for "what it's really worth." The house is 60+ years old now and most developers just want the land. I worry he's going to pass away before he sees any profit from the investment that robbed him of the last decades of his life.
@OracleOutlook, I am your father
In all seriousness, pretty similar situation. The friend spent 10 years taking care of her father and in her head the (hypothetical) money from her father's very valuable London house became the solution to all of the problems in her life. Now prices have dropped massively, she's on the hook (I think) for inheritance tax based on the old value not the new value, and it would be VERY nice amount of money but it's not going to pay for a divorce and a comfortable retirement.
Prime Central London housing is down at absolute most maybe 20% (10-15% is a more realistic number) in nominal (sterling) terms since 2014, more in dollars although with the strengthening now that’s starting to change. A poor investment especially compared to US equities over the last decade, and a loss in real terms, but if her father lived in a house that was worth, say, £3m in 2015, she’s still doing pretty well today.
If you bought a house in central London any time before 2012 or so, you’ve made good money. If you bought before 2004/2005 you’ve made a lot of money. If you bought before 1998 or so you’ve made insane amounts of money. That’s all still true.
How the hell is "prime Central London housing" down, at all??? (And can American blue states be persuaded to do the same?)
Why would it not be down? Salaries in London are flat, crime is rising, illegal immigration is unstoppable, the country is in a state of complete malaise, and most of all there's just not that much to recommend London relative to Vancouver, New York, Seattle, Sydney, Dublin, Zürich or even Berlin or Barcelona if you want to invest some money in property. If American blue states want to get there, well, just raise taxes and reduce quality of life as much as you can -- you'll get there eventually.
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It’s down for a couple of reasons:
Between approximately the early 90s and early 2010s it was by far the favorite place for the global rich to park money in residential property, with insane appreciation that drove more inflows (like US tech stocks over the last decade) and a reputation for looking the other way when it came to the source of the money. Over the last 10 years Dubai has increasingly taken that role; it’s closer to Asia for the Indians, the Russians were forced there by sanctions, and the Arabs are from there (or the Gulf, at least). The Chinese are also increasingly more wary of the West and like Vancouver and Australia (closer to China) more anyway. A combination of Sterling’s decline versus the dollar and the outperformance of US equities has made London property less attractive. Consider that if you bought London property in 2008 you might have made a solid return in sterling terms, but lost money in dollars because the pound declined from $1.95 to $1.27 in that time. Plus the UK government yielded to American pressure and started confiscating property from corrupt foreigners.
A stagnated UK economy with high taxes on high earners has kept domestic demand low (by 2009 central London property had reached the point where even the most successful echelons of the domestic PMC couldn’t really afford it anymore with some exceptions). In addition, increases on property purchase taxes, long-rumored (and now finally happening) changes to taxation for international rich people who make most of their money outside of Britain, Brexit and the resulting economic uncertainty all put a cap on prices and then led to a slow decline. Higher interest rates have also made it much less attractive because even though rental yields were very low, so were returns elsewhere and so was inflation, increasing the impetus to sell now that inflation is higher and the rental market can only bear limited increases. Then there are some short term policy things around Labour coming to power and making things more expensive for rich people.
Could America replicate it? Not really. Outside of the very top end of the market in Manhattan, Miami and to some extent certain fashionable parts of Los Angeles (and even then…) the US market is driven almost entirely by domestic demand, the great majority of buyers of high end property are US citizens and always have been. You could crash the American economy, of course…
Interesting! Pity it's not transferable to other countries, since "encourage foreign real estate speculation" was never a good policy, to begin with.
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A more cynical commenter than me might suggest it's because it takes an apocalyptic event for the federal government to stop propping up house prices.
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They can, in real terms. In nominal terms, people will tend to stay in one place when the market is bad, reducing supply and providing a lot of resistance to price drops. They do happen of course, as in the GFC.
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