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Very good article: http://www.economist.com/news/finance-and-economics/21575737-lessons-americas-long-history-property-booms-betting-house

Betting the house

Lessons from America’s long history of property booms

Apr 6th 2013 |From the print edition

ROBERT MORRIS would have enjoyed the recent American housing boom. A signatory of the Declaration of Independence, he profited handsomely in the 1790s by “flipping” land on the American frontier. His business, acquiring millions of acres from Native Americans and friends of the crown and then selling them on to speculators, probably made him the richest man in America until dearer credit left him bankrupt. In a new paper Edward Glaeser of Harvard University argues that America’s long history of property manias has lessons for those aiming to minimise the pain of future busts. In particular, exuberant buyers may be more rational than many assume.

20130406_FNC339.png

Robert Shiller, a Yale University economist and prescient housing-bubble spotter, reckons that “animal spirits” animate investors during bubbles. He sees America’s recent housing boom as an especially bad case of irrationality. Yet Mr Glaeser notes that the episode fits comfortably within America’s speculative past (see table). And assumptions of irrationality may let economists off the hook too easily. In fact, he writes, booms are often consistent with reasonable beliefs about the future—an important fact for bubble diagnosticians to note.

In this section

On sensible reckoning, for example, agricultural land in Alabama was a steal in the 1810s. Cotton production on Alabama farmland was highly productive, and cotton prices were surging on demand from British textile manufacturers. In 1817 land sold at about $35 per acre (in 2012 dollars), twice the national average for unimproved land. Prices almost quadrupled to $134 per acre the next year. Even those values implied large profits at going cotton prices, suggesting land remained a good buy. Yet when recession struck in 1819, farm prices dropped and leveraged buyers went bust. A prolonged price slump followed; by 1850 land cost just $5 per acre. Optimism, though warranted, led to financial carnage.

The Chicago boom of the 1830s reached even greater extremes. At the time, water access was critical to trade. In 1816 it cost as much to move goods 30 miles over land as to ship them across the Atlantic Ocean. Land near key ports and shipping routes was therefore extremely valuable. The Erie Canal led to economic booms around the Great Lakes, and Chicago’s proximity to the Mississippi river system made it an attractive bet. In 1830 Chicago land went for a song at $800 per acre (in 2012 dollars). In just six years the value soared to $327,000 per acre, with some plots fetching $1m. Tighter international credit conditions led to panic in 1837. By 1841 prices had fallen back to $38,000 per acre.

Yet this was more a product of unpredictability than irrationality. Given the risk that Chicago might fail to become a great metropolis, values immediately after the crash look low but justifiable. Prices at the peak were also consistent with reasonable views. At the time Chicago’s prospects looked uniquely bright. Land values in 1836 made sense given the defensible assumption that Chicago prices would rise to a fourth of those in New York city. And, Mr Glaeser notes, people who bought and held land through the crash prospered over the next two decades: average annual returns through to 1856 were about 9%.

In his seminal history of financial manias, the late Charles Kindleberger noted that unexpected good news or optimism often provides the beginnings of a bubble. Mr Glaeser argues that America’s booms fit the pattern. The unknowable impact of new developments, like the settlement of the frontier or the advent of the skyscraper, motivates optimistic property bets.

If investors are not irrational, they may nonetheless fall prey to a dangerous nearsightedness. Over the long run high prices lead to more supply, a dynamic often forgotten in the heat of a boom. Alabama’s land rush rested on expensive cotton. But dear cotton led to an explosion in world production. As a result cotton prices dropped by 50% between 1818 and 1820, reducing expected profits on typical Alabama land by roughly 90%. American agricultural land boomed and busted again in the early 20th century in response to similar movements in wheat prices. Dear wheat led to land booms but also encouraged the rise in yields that eventually popped the bubble.

Urban real estate is just as vulnerable. New York and Chicago boomed in the early 20th century. Adjusted for inflation, land values in New York City leapt by more than 50% in the 1920s, buoyed by high rents and new high-rise technology that boosted the earning potential of a single property. Investors were slower to appreciate skyscrapers’ effect on supply. The erection of 50-storey buildings on just half of Chicago’s Loop business district would have generated a tenfold increase in its 1933-era square footage. In practice, it took less construction than that to send prices down.

New supply also helped to check America’s most recent housing spike. Suburban home prices soared despite America’s almost unlimited capacity to build. As Mr Glaeser quips: “The entire country could fit in Texas with more than one acre per household.” Rising prices in tight markets eventually weakened in the face of the construction boom they helped to stimulate.

The wrong option

Although easy credit is a common thread in America’s property history, low interest rates are unfairly maligned, Mr Glaeser reckons. Booms have occurred amid rising, falling and flat rates. The underpriced option to default looks more dangerous. An 1800 land act allowed buyers of public land to post a fraction of its cost upfront and delay payments for two years. That created a window for buyers to observe prices before deciding whether to pay or default, making land bets far more attractive. Mortgage securitisation was a new fad in the 1920s and unwary investors may have underappreciated the risk of default. Zero-down mortgages and federal guarantees probably played a similar role in the 2000s. Americans are incurable property gamblers, history suggests; best not to subsidise their wagers.

Economist.com/blogs/freeexchange

From the print edition: Finance and economics

Edited by Tired of Waiting

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Interesting. I'd like to know what are his thoughts on the london bubble.

London is an unusual case, of course, with a lot of foreign buyers, and limited space for expansion. Still, London has a much lower housing density than Paris for instance. Even London would benefit from a supply increase.

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Left him bankrupt.

Amazing. Even back then they had the spivvy attitude of not putting away a single penny for a rainy day.

Their greed is only rivaled by their need for instant gratification.

You're being unfair. Yes he could have sold but he wasn't going to 'give it away'

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Left him bankrupt.

Amazing. Even back then they had the spivvy attitude of not putting away a single penny for a rainy day.

Their greed is only rivaled by their need for instant gratification.

"They" who?

The Welsh?!

http://en.wikipedia.org/wiki/Robert_Morris_%28financier%29

:D

.

Edited by Tired of Waiting

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Something specific to UK in MoneyWeek magazine - I don't know how reliable they are or is this just headline grabbing:

http://info.moneyweek.com/urgent-bulletins/the-end-of-britain/

From the article: The End Of Britain

The next domino to fall will be the housing market. Most mortgages are linked to interest rates. As interest rates shoot upwards, millions of people will be pushed “underwater” by a combination of falling housing values and rising mortgage payments.

They claim to correctly predict the Eurozone fallout, the 2008 crisis etc.

:unsure::unsure:

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Something specific to UK in MoneyWeek magazine - I don't know how reliable they are or is this just headline grabbing:

http://info.moneyweek.com/urgent-bulletins/the-end-of-britain/

From the article: The End Of Britain

The next domino to fall will be the housing market. Most mortgages are linked to interest rates. As interest rates shoot upwards, millions of people will be pushed “underwater” by a combination of falling housing values and rising mortgage payments.

They claim to correctly predict the Eurozone fallout, the 2008 crisis etc.

:unsure::unsure:

I think they have a point, but they are exaggerating it, and using misleading data, such as the chart below using nominal figures, as opposed to real, inflation adjusted ones. And they didn't need that. They could just use solid data, and they would reach a similar conclusion. Britain will change much more deeply than most people realise.

uk_total_state_spend.jpg

---------

Edit: I've found a very interesting quote there, from a LABOUR Prime-Minister:

“We used to think you could spend your way out of recession and increase employment by boosting government spending… I tell you that option no longer exists. And so far as it ever did exist, it only worked on each occasion… by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step.”callaghan.jpg

Jim Callaghan.

Edited by Tired of Waiting

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I think they have a point, but they are exaggerating it, and using misleading data, such as the chart below using nominal figures, as opposed to real, inflation adjusted ones. And they didn't need that. They could just use solid data, and they would reach a similar conclusion. Britain will change much more deeply than most people realise.

uk_total_state_spend.jpg

---------

Edit: I've found a very interesting quote there, from a LABOUR Prime-Minister:

“We used to think you could spend your way out of recession and increase employment by boosting government spending… I tell you that option no longer exists. And so far as it ever did exist, it only worked on each occasion… by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step.”callaghan.jpg

Jim Callaghan.

MoneyWeek have been consistently predicting a HPC since 2003. And have been consistently wrong (leaving aside arguments about valuations in gold, foreign currencies etc).

Callaghan's famous quote should be nailed above the doors to both no.11 and the Treasury. Sadly those who will not learn from the past etc. They will keep rates down using whatever money-printing variations they can, and it will slowly leak into price inflation, but if they can prevent it running away (>8%) then the can can be kicked several more years down the road yet. That call to the IMF is still a long way away, barring economic shock.

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MoneyWeek have been consistently predicting a HPC since 2003. And have been consistently wrong (leaving aside arguments about valuations in gold, foreign currencies etc).

Callaghan's famous quote should be nailed above the doors to both no.11 and the Treasury. Sadly those who will not learn from the past etc. They will keep rates down using whatever money-printing variations they can, and it will slowly leak into price inflation, but if they can prevent it running away (>8%) then the can can be kicked several more years down the road yet. That call to the IMF is still a long way away, barring economic shock.

Well, in real terms house prices did come down, but by much less than Money Week and most of us predicted, granted. They made the same mistake most of us made: they've used logic.

The Callaghan's quote is the case in point. Most of us thought these basic lessons had been learnt already... :(

I agree completely with your inflation comment, that is indeed the question: controlled or runaway?

But I think there is another risk, The OP article mentions repeatedly the importance of supply increases to deflate a price bubble. If ours keep blocked by planning, our correction will continue to be very slow and shallow. And this will keep being a burden on our productive sectors, like I keep saying in my forum signature, below.

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Well, in real terms house prices did come down, but by much less than Money Week and most of us predicted, granted. They made the same mistake most of us made: they've used logic.

The Callaghan's quote is the case in point. Most of us thought these basic lessons had been learnt already... :(

I agree completely with your inflation comment, that is indeed the question: controlled or runaway?

But I think there is another risk, The OP article mentions repeatedly the importance of supply increases to deflate a price bubble. If ours keep blocked by planning, our correction will continue to be very slow and shallow. And this will keep being a burden on our productive sectors, like I keep saying in my forum signature, below.

I don't share the 'real terms' view because I see wage inflation as much more relevant to house prices than price inflation, and wage inflation has been far lower.

I do share your analysis on the importance of restricted supply to UK HPI - this was the conclusion reached by Hilber and Vermuelen in their 2010 paper commissioned by the National Housing and Planning Advice Unit (government housing quango), "The impacts of restricting housing supply on house prices and affordability: final report". Dr Hilber (LSE) has written several papers on the subject of the effects of housing supply restrictions but the government shows no signs of being interested in reading the research it asked for.

The supply angle is a hobby horse of mine and earlier today I submitted a rather long new topic post on the recent government u-turn on relaxing planning regs for home extensions, but it didn't get mod approval - it was rather waffly and doubtless boring.

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MoneyWeek have been consistently predicting a HPC since 2003. And have been consistently wrong (leaving aside arguments about valuations in gold, foreign currencies etc).

to be fair to MoneyWeek:

- there was a 20% HPC fall just after 2007 across England

- Belfast is 50% down

- all other EU countries have HPC falling as well

- it seems that just London is the culprit of the irational market

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I don't share the 'real terms' view because I see wage inflation as much more relevant to house prices than price inflation, and wage inflation has been far lower.

Even in relation to earnings HPs have declined, but too little and too slow. And very little in the Southeast - where the supply has been most restricted BTW.

hptoearningsbyregion.png

I've used data from this source: http://www.communities.gov.uk/housing/housingresearch/housingstatistics/housingstatisticsby/housingmarket/livetables/affordabilitytables/

From the "Table 577: Ratio of median house price to median earnings by district, from 1997, MS Excel, 185 kb"

I do share your analysis on the importance of restricted supply to UK HPI - this was the conclusion reached by Hilber and Vermuelen in their 2010 paper commissioned by the National Housing and Planning Advice Unit (government housing quango), "The impacts of restricting housing supply on house prices and affordability: final report". Dr Hilber (LSE) has written several papers on the subject of the effects of housing supply restrictions but the government shows no signs of being interested in reading the research it asked for.

The supply angle is a hobby horse of mine and earlier today I submitted a rather long new topic post on the recent government u-turn on relaxing planning regs for home extensions, but it didn't get mod approval - it was rather waffly and doubtless boring.

Can't you post just a summary? And a link to a larger source?

And do you have links to this Hilber and Vermuelen paper and Dr Hilber page please?

Thanks,

ToW

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Can't you post just a summary? And a link to a larger source?

And do you have links to this Hilber and Vermuelen paper and Dr Hilber page please?

From a report on the progress of the bill to make minor planning regs changes (larger single-story home extensions) at http://www.bbc.co.uk/news/uk-politics-22254646 I said that:

- the NIMBYs have slapped the government in the face and the government has run away.

- the relatively modest proposals attracted ferocious attacks (imagine if they actually tried to allow new homes to be built). this has obviously scared this timid and careerist govt and there will be no further attempts at even the smallest planning reform during this parliament.

- a rebellion halved the coalition majority, showing which issues and whose interests backbench MPs favour.

- the amendments effectively neuter the original legislation as a single NIMBY objection can now force the application through planning, making the whole thing largely a waste of time and money.

- the amendments will create more bureacracy i.e. more planning officers on the backs of taxpayers - young people may want to consider a career in planning since it is a protected if not growth industry for the foreseeable.

- Eric Pickles agreed to "bridge the divide" rather too easily.

- NIMBY-In-Chief Lord True (Richmond council leader, Cons.) and others were crowing having given the govt a good kick in the nuts.

- Labour were just as bad so there will be no change in policy come 2015

- Osbourne has caved in twice now on proposed planning reforms (one major, one minor) and has obviously decided to switch support to the 'other' side now as FLS, LFH etc show

- Nick Boles is left twiddling his thumbs as his relatively more radical line of thinking (building new houses on greenbelt) will be ignored, and he could not be blamed for moving on elsewhere.

- it has been a sad and depressing few weeks for young families in the SouthEast with this and the Budget schemes.

2010 paper: https://www.gov.uk/government/uploads/system/.../1767157.pdf

Dr Hilber: http://www2.lse.ac.uk/researchAndExpertise/Experts/profile.aspx?KeyValue=c.hilber@lse.ac.uk

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From a report on the progress of the bill to make minor planning regs changes (larger single-story home extensions) at http://www.bbc.co.uk/news/uk-politics-22254646 I said that:

- the NIMBYs have slapped the government in the face and the government has run away.

- the relatively modest proposals attracted ferocious attacks (imagine if they actually tried to allow new homes to be built). this has obviously scared this timid and careerist govt and there will be no further attempts at even the smallest planning reform during this parliament.

- a rebellion halved the coalition majority, showing which issues and whose interests backbench MPs favour.

- the amendments effectively neuter the original legislation as a single NIMBY objection can now force the application through planning, making the whole thing largely a waste of time and money.

- the amendments will create more bureacracy i.e. more planning officers on the backs of taxpayers - young people may want to consider a career in planning since it is a protected if not growth industry for the foreseeable.

- Eric Pickles agreed to "bridge the divide" rather too easily.

- NIMBY-In-Chief Lord True (Richmond council leader, Cons.) and others were crowing having given the govt a good kick in the nuts.

- Labour were just as bad so there will be no change in policy come 2015

- Osbourne has caved in twice now on proposed planning reforms (one major, one minor) and has obviously decided to switch support to the 'other' side now as FLS, LFH etc show

- Nick Boles is left twiddling his thumbs as his relatively more radical line of thinking (building new houses on greenbelt) will be ignored, and he could not be blamed for moving on elsewhere.

- it has been a sad and depressing few weeks for young families in the SouthEast with this and the Budget schemes.

2010 paper: https://www.gov.uk/government/uploads/system/.../1767157.pdf

Dr Hilber: http://www2.lse.ac.uk/researchAndExpertise/Experts/profile.aspx?KeyValue=c.hilber@lse.ac.uk

Excellent post.

And thank you for the links as well.

The younger generation is being robbed blind. The saddest thing is that most don't even realise that.

And most NIMBYs also manage to find ways to blind themselves from their responsibility in this whole mess. Incredible. Just amazing. And horrible.

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  • 244 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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