House prices and interest rates：Keeping it real

http://www.economist.com/blogs/buttonwood/2012/04/house-prices-and-interest-rates

ONE of the most interesting questions at the moment is why US house prices have corrected back to what looks like fair value, when prices in many European markets have not. In today's FT, Martin Wolf cites Ben Broadbent (now on the monetary policy committee) as citing low real rates as a reason for the continued strength of British prices. This bugs me for two reasons, one practical and one theoretical (which I shall leave to the end of the post for those who care).

The practical reason is, of course, that US real interest rates have fallen too. So why haven't US house prices been buoyed by the same process? Before you give the answer that the US simply built too many houses, you should recall that Spanish and Irish house prices haven't fallen back to fair value* either even though both countries are replete with empty properties.

 

It also struck me that measures of real rates that take official borrowing costs can be skewed (not least by QE). Homeowners can't borrow at the same rates as governments. So the key measure of real rates is the cost of mortgage finance minus the rate of wage growth. That is shown in these two charts, with the house prices index on a separate axis. As you can see, real rates have plunged in the US to their lowest levels in the last quarter-century, but it hasn't helped the housing market at all.

Indeed, if you take the 24 years covered by the US data and divide them into three, then the average house price gain when real rates were high was greater (at 2.25%) than when real rates were low (1.7%).

In Britain, by contrast, low real rates do seem to have made a difference. They were falling through the long boom, spiked (thanks to low wage growth) in 2009 and then fell again. In the 15 years for which we have data, the third of years in which rates were highest saw average price falls of 1.6% while the third of years where rates were lowest saw average gains of 9.6%.

But this is rather unsatisfactory; why should real rates make so much difference on one side of the Atlantic, but not on the other? There will be more on this next week but let us turn to the theoretical issue.

Low real rates drive asset prices up (say the experts) for the same reason that low yields drive bonds higher. But let us think about this in terms of the simple (ish) example of an inflation-linked bond. Take the 2.5% 2024 issue from the UK government (the numbers are here). The bond's maturity value will be par multiplied by the ratio between the RPI eight months before issue (97.7 in this case) and the same index eight months before maturity. Currently, the RPI is 232.5 so the bond's fair value is around 235% of par. But it trades at 327% of par; in other words, the real yield has fallen and the price has risen. If the RPI does not change from here, investors will suffer a capital loss. Or to put it another way, at maturity, the bond's real yield will have to rise again.

Now there may be many reasons to buy bonds on such a low yield; most notably, pension funds use them to match their liabilities and so are indifferent to price. But one can see a return to the mean is built into the structure of the bond.

But what about real assets like equities and houses? The big argument at the end of the 1990s was that equities deserved higher valuations because real rates were low. Since, in theory, the current price ought to be equal to the discounted value of all future cashflows, then, other things being equal, a fall in the discount rate ought to lead to a rise in prices. But other things aren't equal. Low real interest rates should suggest low expectations for future growth. This is true whether (as now) low rates have been engineered by central banks, or whether it is the result of supply and demand for savings. In the former case, central banks are holding rates low because they are worried about the growth rate; if they are wrong then inflation will quickly emerge (and rates will have to rise). In the second case, low rates would be the result of desired savings being higher than desired investment; there are simply not enough exciting investment projects to go round, which implies low growth.

Just as share prices are the discounted equivalent of future corporate cashflows, then house prices should be the discounted value of future rents. Now rents have rebounded a bit (yields were very low). But it surely isn't plausible that rents can rise rapidly year after year in a low growth environment because how will tenants afford them? In other words, either the Bank of England has got its monetary policy completely wrong or UK house prices are still too high**.

* Fair value assumes that, as in the US or Germany, house prices don't rise in real terms over the long run or that they rise very slowly, say 1% a year.

(**Some of you may have alternative explanations eg population density but this is already a long post and I'm going to try to deal with the issue in next week's column.)

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文中提到美、德等國的房價上漲超慢且幅度極低（約年1%）左右。。。

偶的認為：他們不是依靠房地唱為主支柱增加國民收入總產值（GDP）的，他們都有自己的技術和工業增長點，這財富累積更多的是依賴技術和創新，而兲朝在過去的10年裡其實真的是靠內需（房地產）和貿易盈餘催起來的虛胖！現在失去了貿易這條承重的右腿，僅靠過度使用的左腿是跑不出直線的！

歸根結蒂還是要搞技術！創新才能增加財富，虛擬經濟（金融類如債券和股市等）是投機（其實就是給那些被繞了脖子的實幹的人的巧取豪奪），一旦社會上這類投機達到或超過一定比例。。。那麼不是危機就是海嘯，等著瞧！