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E-mail this SURVEY: PROPERTY A boom out of step May 29th 2003 From The Economist print edition The recent surge in many countries' house prices has been oddly timed MOVEMENTS in house prices have a much bigger effect on economies than swings in share prices. Unfortunately timely data on house prices across different countries are much harder to come by than share-price information. To help fill this gap, The Economist last year launched a set of global house-price indices for 13 developed economies, going back to 1975 and giving both nationwide averages and figures for big cities. The data, which are updated quarterly, come from a variety of sources, including estate agents, lending institutions and government agencies. The indices may not be fully comparable between countries, but they are based on the most reliable figures available. Since 1995, house prices have increased threefold in Ireland, more than doubled in the Netherlands and Britain, and gained at least two-thirds in Australia, Spain and Sweden (see table 4). After adjusting for inflation, real house prices have increased by more than 25% everywhere except Japan, Germany, Canada and Italy. In many countries prices have risen faster in real terms than during previous booms. Real house prices normally fall during economic downturns, but in this cycle prices in most countries have accelerated. Low inflation has meant that central banks have been able to slash interest rates. This has encouraged new mortgage borrowing, fuelling house-price inflation. The biggest increases in house prices last year were in Britain (25%) and Australia (18%). The 27% real price increase in American homes since 1995 seems modest compared with the gains in some European countries, yet it is the biggest ever seen in the United States during any cycle in the past half-century, and twice as large as the price gains during the real-estate booms in the late 1970s or the late 1980s. National figures conceal even larger increases in some of the big cities. In New York real home prices have risen by 47% since 1995, almost twice as fast as the national average; In many other countries, too, prices in the big cities have gone up much faster than average, most notably in London, where prices have risen by a vertiginous 136% in real terms since 1995.
At the other extreme, house prices have fallen in nominal as well as in real terms in Germany and Japan over the past seven years. A house in Tokyo now costs less than half what it did in 1991, after a now legendary property-price bubble in the late 1980s. Yet the 36% real increase in average house prices in Japan in the seven years to 1991 was less than the increase over the past seven years in half of the countries we track in our index. German houses used to be the most expensive in Europe: in 1975, they cost three times as much as French ones. Today the two have more or less evened up, largely because German house prices have been steadily declining in real terms. Germany is still suffering a hangover from a massive construction boom after unification, encouraged by government subsidies and tax breaks. Prices in eastern Germany are still falling in response to excess supply, though in western Germany they have risen slightly over the past few years. It has not helped that Germany has the highest real interest rates in the euro area because it has the lowest inflation rate. By contrast, in Spain, Ireland and the Netherlands, which have seen the biggest house-price gains in the euro zone, real interest rates in recent years have been much lower, or even negative, because these countries have had above-average inflation rates. Spain's housing boom has also been fuelled by rapid growth in jobs and incomes as the economy has been catching up with the rest of the European Union. Moreover, there was a frantic rush to spend black-economy pesetas and D-marks on homes in Spain before the introduction of the euro made them hard to convert. Some of the biggest price gains have been in holiday homes on the Costa del Sol and other coastal areas, thanks to a flood of foreign buyers, especially Britons and Germans. Spain, Ireland and the Netherlands also have the most generous tax relief on home-buying in Europe. In the Netherlands, mortgage-interest payments are 100% tax-deductible at the buyer's top marginal rate. The Dutch mortgage market has also become much more competitive over the past decade, making it easier for home buyers to get bigger loans. Ireland's extraordinary housing boom has been spurred by rapid population growth, negative real interest rates and a booming economy. The Irish government introduced anti-speculation measures in 1999-2000, including a 9% stamp duty on investment properties and an annual 2% tax on the value of a property for the first three years if rented out. After dipping briefly in 2001, house prices took off again last year. The two other big euro-area economies, France and Italy, have both seen house-price inflation of 5-6% a year in real terms over the past four years, but this follows five or more years when real prices slumped after a boom in the late 1980s and early 1990s. Despite the recent jump in prices, Italian houses are still 8% cheaper in real terms than they were in 1992. Surfing the waves Over time, housing booms and busts in Europe, and especially in Britain, have been more pronounced than in the United States (see chart 5). House prices have also been more volatile in cities, where the supply of building land is more limited. For example, London house prices soared by 120% in the five years to 1989, then fell by 30% over the following four years. During the past five years they have leapt again, this time by 110%. Over the past two decades national average house prices have rarely fallen by much in nominal terms (except in Britain and Sweden in the early 1990s, the Netherlands in the early 1980s and in Japan over the past decade). But in real terms, price declines of one-third or more are nothing unusual, examples being Australia, Italy and Spain in the early 1980s. Falls in nominal prices are much more common in big cities. Not only London but Boston, New York and San Francisco, too, saw prices drop steeply in the early 1990s. After the boom of the past few years, the market now seems to be stumbling in some countries. House-price inflation has slowed sharply in America this year, and prices in New York have actually started to fall, especially at the top end of the market. Average house prices in the Netherlands dipped in the final months of last year. Prices in London have already fallen by 10% from their peak, and weakness is spreading to other parts of Britain. According to the Royal Institution of Chartered Surveyors (RICS), a net balance of 31% of surveyors throughout Britain said that prices had fallen in the three months to April. The cumulative fall in the RICS index over the past six months has been the largest since 1988, which heralded a steep fall in house prices.
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