In a well-run economy, “home prices should fall”.

Visionaries and other thought leaders are fond of suggesting that the way another city, region, country or planet does things is the solution to one of our own pressing problems.  “If only we did it the way they do it in Eastern Slobovia, everything would be fine.”

Often the alleged solution takes a practice out of its context–the context that created the practice, and the only context in which the practice can work.  Or the recommended solution isn’t a solution at all, but merely a symptom, overlooked or misinterpreted by someone blind to the context.

I’m reminded of a 2010 study by the New York Federal Reserve which held out Buffalo as a model for avoiding real estate bubbles.  Yep, upstate New York could teach us frothy coastal markets a thing or two about keeping it cool, real-estate wise:  thanks to a lack of “nonprime” aka subprime lending, upstate didn’t go bonkers during the boom, nor did it crater during the bust.  The lesson:  slow and steady wins the real estate race.

Except that as I said back in 2010, “Here’s upstate’s wholesome secret: its real estate isn’t a train wreck because it never left the station.”  With people and jobs fleeing the region for decades, “you won’t have the sustained, overwhelming momentum that, in [the Bay Area] eventually priced credit-challenged and less affluent buyers out of prime neighborhoods and into the cheaper Central Valley, now [in 2010] a top-10 foreclosure hotspot. There won’t be the momentum that, in this area, eventually forced the credit-challenged and less affluent into nonprime loans guaranteed to soon be non-performing loans.”

“Buffalo’s lesson in a nutshell?”, I continued relentlessly.  “Dim prospects. Because it’s hard to work up a decent real estate frenzy when buyers keep leaving for greener pastures. And snow, lotsa snow. Because it’s hard to get the real estate bandwagon going when it’s stuck in 93.6 inches of snow.”

A “lesson” taken out of context, not applicable to coastal markets or even desirable.

Now we have one Eamonn Fingleton, a Forbes contributor who keeps “a sharp eye on media bias, official propaganda and globaloney”, making the startling–yet appealing, no doubt, to some–assertion that “in [the] world’s best-run economy [Germany], house prices keep falling–because that’s what house prices are supposed to do”.

He cites the instance of municipal authorities in a “picturesque” German town making a home seller reduce by one-third the price he received from a foreign buyer because it was “too high”.  Hey!  Wouldn’t it be great if Silicon Valley municipal authorities decided that foreign investors had artificially inflated local housing prices, and made home sellers give back the price appreciation they’ve realized over the past five years?

Wouldn’t it? 

“While the Goerlitz authorities are probably exceptional in the degree to which they micromanage house prices,” Fingleton acknowledges, “a fundamental principle of German economics is to keep housing costs stable and affordable” by:

  • “releasing land for development on a regular basis”
  • encouraging renting through strong rent control
  • requiring minimum 20 percent down payments
  • a “serious consumption tax” on home owners, and
  • tax breaks for landlords

These measures succeed in “virtually eliminating bubbles” in German real estate, according to Fingleton.

Except that according to German publication Der Spiegel, Germany had its own horrendous boom and bust in real estate in the 1990s.  That, plus “sluggish economic growth” and a stock market crash at the turn of the century, put German housing prices in a tailspin from which they’ve only recently begun to recover.

So much so that lately there’s talk of a real estate bubble in Germany’s major cities.  According to The Irish Times, “Rising rents and fears of gentrification are hot button issues in Germany’s looming election season, where rising land prices mean builders are only targeting the higher-end of the market.”  So how is this an improvement on Silicon Valley?  “For the rest of the population, the new reality is longer queues for flat viewings within limited regular housing stock.”

A little more research tells me that the characteristics of the German housing market are heavily influenced by that bit of unpleasantness called World War II, which destroyed much of the country’s housing stock.

Context.  It’s all about context.

But are house prices really supposed to go down in a well-managed economy?  Replying to a reader comment, Fingleton asserts that “the true purpose of an economy is [to] ensure that all consumer prices fall in real terms. That is otherwise known as productivity.”

Well, as I say, this is music to the ears of anyone who thinks homes cost too much.  Except that, as we’ve seen, home prices in Germany are fully capable of going up.  In fact, Global Property Guide exclaims that “German house prices are on fire!”

“In a country where the housing market has historically been extraordinarily stable,”, the site says, “this is a significant shift. The reasons?  Strong economic growth, 1.1 million refugees, high work-related immigration, weak construction supply and low interest rates.”

Aside from those 1.1 million refugees, this sounds a lot like Silicon Valley.  Is it possible that even in a Utopia of Teutonic regulation, central planning, state ownership, meddling local authorities and preferential treatment for renters instead of home owners, market forces can still make home prices skyrocket?

As I said of Buffalo back in 2010, “a real estate example not necessarily worth emulating, a ‘thought leader’ not necessarily worth following”.

copyright © John Fyten 2017





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