Among this morning’s email is a graph from the nice people at McKinsey showing real house prices in selected countries since 1970. Even after the fall from their recent peaks, when they were 300% up, homes in Belgium, Spain and the UK still cost some 250% more than they did in 1970, adjusted for inflation. At the other end of the scale, German homes are cheaper, and Japanese ones, after rising and then falling in the 80s and 90s, have barely budged. Homes in the US have doubled in real terms. These are presumably nationwide averages, thus splitting the differences between, say, Detroit (where homes are probably cheaper today than 40 years ago) and Manhattan.
Aside from the ever-popular excess availability of credit, there are various reasons why property prices can make significant gains over the decades. A rising population increases competition for the fixed amount of space, so people divert expenditure from savings or less essential items like fancy clothing or travel to bid up the price of accommodation. Growing prosperity and purchasing power enable people to pay more for somewhere to live even without cutting back on other spending. A country or region offering residents opportunities for higher earnings (maybe following economic reforms, as in post-70s Thatcher-Blair UK) will both attract more inhabitants and boost their purchasing power. The trend towards double-income families, where both husband and wife work, means further bidding-up of house prices.
Culture and politics come into it. Home ownership is officially encouraged in English-speaking countries on the grounds that it is somehow morally uplifting. People in their early 20s are urged to worry about getting into the market before it’s too late. Add tax incentives, and it becomes an obsession. In Germany, on the other hand, people just rent: who wants the hassle of owning a property when you can just pay for it as you go, as with groceries or utilities? Rents are reasonable, and secure long-term leases are normal.
Restrictions on planning and development add to upward pressure on house prices. In Hong Kong, where the land is nationalized, it is official policy to keep space for housing in artificially short supply. In effect this represents a hidden tax, much of it raked off by the developers; it also limits most families to very cramped apartments, which must influence decisions about how many children to have, or whether to live in Hong Kong at all. It also means some 40% of the population can’t afford a place to live, so they are housed by the state, developing a dependency mentality that is compounded by the effects of reduced labour mobility. It would be interesting to know the cost in terms of reduced overall economic vibrancy. Of all the housing patterns in the world, it must be hard to beat that of the Big Lychee for sheer dumbness. But to policymakers who think HK$1.5 billion-per-kilometre rail track is cool, it is simply not possible to conceive of a different system.
Where would Hong Kong be if it were on the chart? With real-estate shysters claiming to be selling new Kowloon apartments to suspiciously wealthy mainlanders for HK$30,000-or-whatever a square foot, our high-end property would have gone through the roof. But averaged out to include Lantau stone huts and Shatin rabbit hutches – many of which are still priced well below the collective-insanity levels of mid-1997 – it would probably be less impressive.
My own apartment was built in 1972, and according to the title deeds it first changed hands at that time for HK$35,000. A quick look at the government’s exciting ‘Implicit price deflators of GDP’ table suggests we should factor in inflation of around 8.5% a year, which gives us a figure of around HK$900,000 in today’s prices. The place is in a walk-up slum, but on the lowest floor and near the Mid-Levels Escalator in a trendy – I am told – neighbourhood.
If property agents are to be believed, places like, or indeed nastier than, my abode are worth HK$5 million. Without being able to precisely quantify the impact of these people’s congenital evilness, hallucinatory drug use and compulsive lying, it is difficult to translate this sum into something realistic. I would guess a sane but well-meaning and busy person of means might give me HK$2.5 million for my apartment. (Bought to live in, obviously, in pre-trendy times for HK$1 million – not far off its original 1972 price, adjusted for inflation. I get my speculative kicks from investments that don’t require me to call plumbers.) This would put Hong Kong around halfway up the graph, near Canada or Norway.
From which we can conclude that the free content McKinsey send out to people on their emailing list is more interesting than illuminating.