On Friday, we looked at how much maintaining a Monarchy costs. We took a peek at what the four largest countries pay, and it’s not exactly cheap. In exchange, Commonwealth countries theoretically receive a better quality of life. We thought we’d look at the numbers behind the quality of life claim. Today we’ll look at real estate prices, and the massive bubble that may be forming.
Real estate prices are soaring across the whole realm, relative to local currencies. Unfortunately, most of the countries in the realm have unreliable data sets to compare. So we’ll take a look at Canada, New Zealand, Australia, and the UK – and how real estate prices have been moving.
Prices Are Soaring
Prices are rising fast. From 2003 to 2016, prices went up on average 71% – substantially higher than the 47% seen in the US. Shocking when you consider that the US had one of the largest real estate bubbles in history during the same period. We already knew Canada is putting the US bubble to shame, but we didn’t know that real estate prices in Australia, the UK, and New Zealand were getting pretty frothy too.
Of the four countries we compared, the most expensive place to buy a home is Australia. In Australia, your average home price rose 65% from 2003 to AUS$623,000 (US$475,165). While that’s steep, the highest price increase was in New Zealand, where prices rose 84%. The average home there will now cost you NZ$612,527 (US$443,797). Heck, even the UK, which had the worst return in local currency, received a 55% increase in prices.
None of these places could pin down what exactly is causing prices to rise so quickly. We did notice that local media kept comparing the cities to Manhattan. Okay, maybe people are optimistic about Vancouver, Auckland, London, and Sydney’s property markets. However, as I kept reading, they all were developing a “Manhattan” – including Papa New Guinea. If your bulls**t alarm didn’t go off, check the batteries.
Are They Going Up?
Obviously everywhere can’t produce a Manhattan. Heck, even Manhattan’s real estate prices aren’t rising this quickly. So we adjusted all home prices for inflation and converted them to a universal currency – the US dollar.
What we found was that prices aren’t going up nearly as fast as they are in local currencies. New Zealand’s massive 84% gain was trimmed down to only 11%. The UK actually dips below the 2003 price when adjusted. Prices rose the most in Canada, but more in line with the US – only 47%. While not terrible, these aren’t the outrageous returns you’re hearing about locally.
Currency Devaluation
Currency devaluation seems to be a large part of why prices are rising so quickly. If you’re paid in USD or yuan, most of those homes are becoming more affordable by the day. This is probably why foreign buyers are popping up so rapidly in Canada, New Zealand, the UK, and Australia. Homes are becoming a better value in the Commonwealth than can be purchased in places like China and the US.
Although, this brings up an interesting question we’ll look at later this week. If prices are rising so rapidly in these countries, are wages doing the same? If not, what we might be seeing is a crunch that will end very badly for domestic buyers.
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The BOC, federal government and banks know what is causing home prices to rise. Low interest rates, mortgage insurance and mortgage securitization. Same issues the US experienced, but at least in Canada we kicked up CMHC a notch above Fannie Mae and interest rates have been lower. We insure and securitize more debt than USA and demand is obviously huge for our AAA mortgage debt that pays about 1% higher than federal government debt but carries the same implied guarantee. It’s demand for securitized mortgage debt means the taps keep flowing – until that implicit guarantee doesn’t mean much.
While household debt rose about $100 billion in the past year, there was $240 billion in fresh mortgage credit issued. $240 billion per year is more than any government in Canada can backstop. Mortgage payments have risen with home prices, up 29% since 2010 despite low interest rates. But low interest rates mean that over $140 billion in principal was repaid (240 – 140 = 100). That’s only because interest rates are about 2%! If they rise, OMG repayment will come to a crawl and debt levels will skyrocket. $240 billion per year is about half the mortgage debt outstanding in 2000, yet inflation has only gone up about 33%.
Wages up 38% in Guelph since 2000. Home prices up 140%. It’s not a city thing. Townhouses up 15% YOY in 2016 in Cambridge. It’s not a detached phenomenon as some argue.
It’s a credit bubble and that’s the only reason home prices are rising. Rising home prices however bring out speculators.
Rent up about the same as wages!
Twice as many homes sold in Toronto as 2000, while population up only 12%. It’s not a supply issue. It’s demand issue, as a result of access to credit.
It’s the same in Australia.
To add, like any bubble, every year we need more mortgage credit issued to keep prices rising. In the past year we issued about $240 billion in fresh credit. In 2010 it was $160 billion. In 2005 it was… and in 2000 it was…
To get those answers we need more than just measuring changes to total mortgage debt outstanding. We need to know “total mortgages issued” as that is the stimulus on home prices. Mortgage repayment is much more indirect as it does not directly effect home prices. Unfortunately the data I’m finding is just the net amount – even though it shows a dramatic increase. But I believe it still understates how much the BOC is shoving credit into the market via homes. Ever think that a home was a money printer? …. That is the primary way the central banks are creating the money supply is through mortgages. Central banks are deliberately doing this and it appears to me, that since 2009, the Bank of Canada has lost transparency in terms of credit issued. They use to issue weekly financial statistics with credit info but then remove the info and said they put it into the credit section of their site. But that section’s information is useless and does not show raw data. It’s intended to be deceiving IMO.
But we can see it is up 50% since 2010, which was a stellar year for real estate. My bet is that we are issuing about 3-4x the amount of fresh mortgage debt as we were in 2000. How can home prices stay the same and yet absorb that type of money?
Of course assets have a price, not a credit payment. So eventually the whole thing comes toppling down destroying wealth, which amplifies the issue.
Great article! Always wonder what’s the cost to Canada for a Commonwealth position…. it’s a lot!
The problem is most people in these countries think that’s just a drop in the buck – why not. In actuality just those four places is almost a 1/4 billion dollars a year. There’s still another 15 to go.
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