by Prince Cruz
Table of Contents
Module 1: The Global Property Guide
- What the website is all about
- Basic assumptions on property and real estate market
- Our readers
- Different sections and subsections of the site
- Our data: definitions, assumptions and sources
Module 2: Factors affecting housing markets
Module 3: Mortgage markets, interest rates and monetary policy
- Loan-to-value (LTV) ratio
- Housing loan term (in years)
- Initial rate fixation (IRF)
- Size of mortgage market (mortgage to GDP ratio)
- Secondary mortgage market
- Interest rates and mortgage rates
- Interest rates and foreign exchange rates
Module 4: Tax credits, housing supply and government intervention
- Government housing construction programs
- Building restrictions
- Zoning restrictions
- Other government interventions
Module 5: Housing cycles, valuation, and bubbles
Module 6: Effects of politics, culture and history on housing markets
Module 7: Writing the Price History and Overview
- Balancing analysis with readability
- Length of sentences and paragraphs
- Use of words, terms and jargon
- Formalism and passive sentences
- Graphs and illustrations
- Writing a price history article
MODULE 1: THE GLOBAL PROPERTY GUIDE
What the website is all about
The Global Property Guide is a website intended to give information on residential property buyers and investors. It provides information on price movements, rental yields, property prices, taxes, transaction costs, buying process and others.
Basic assumptions on property and real estate market
One of the most basic facts we face is that the real estate market goes through cycles (housing cycles and property valuations are discussed further in Module 5). Starting from an equilibrium position where supply equals demand, a change (lower interest rates, rapid economic growth, removal of taxes, or liberalization of the market) will lead to higher demand for properties. Because supply is generally inelastic in the short run, the increase in demand will lead to higher property prices. Responding to the price increase, developers will start building more houses. Eventually, this new supply will dampen prices, until equilibrium is achieved once more.
The speed by which each part of the cycle happens is determined by all the factors affecting supply and demand for housing (discussed in Module 2). The confluence of all these factors makes analysis of housing markets challenging. Each country is similar in certain aspects but different in other aspects.
Another issue is the behavior of property buyers. There are two basic types of buyers, the owner-occupier and the investor. With different motivations, they may respond differently to the same stimulus, though no study has found that these differences have major significance. There are, of course, people in between, e.g. a young urban professional who purchases a condo near his workplace with the intent of selling it five years later. There are also property investors who concentrate on flipping, buying and selling the property within one or two years. Other investors hold property for a longer period, maximizing capital gains and rental income.
Whatever the intention is, property buyers are assumed to be rational, long-term planners. Very few people wake up one morning then suddenly buy a new house on the way to work. Very few people can actually afford to do that also. Nevertheless, there was a time that a lot of people seemed to be able to. From 2001 until around 2006/ 2007, loose monetary policy made investments relatively cheaper. Low key interest rates set by central banks in Europe, the US, Japan and other developed countries pushed mortgage rates down. The introduction of the euro and the seemingly insatiable appetite of China (and other developing countries) for dollar-denominated bonds added to the downward pressure on interest rates.
Cheap money found its way to property markets around the world. Leading the charge were Britons, Germans, Americans and later on other Europeans and Russians bought properties in Spain, Greece, the Baltic, and the Middle East. Some money found its way to the Caribbean, Latin America and Asia. The global property boom was so massive that real estate viewing tours became common. The buying frenzy stopped after the US rapidly raised its key rates to cool inflationary pressures brought by historic high fuel, food and commodity prices. Europe and other countries soon followed. Higher interest rates exposed problems with subprime mortgages in the US. These events led to a global financial meltdown and economic slowdown. A lot of countries and individuals were seriously affected by the property burst.
Global Property Guide readers are mainly highly educated people with savings and investments. They would be comfortable with basic economic and financial concepts such as yields, rate of return, GDP, inflation, mortgage rates and exchange rate. Definitely, they know how to use Google and Wikipedia, hence, there is no need to provide travel brochure type statements like "Country X boasts of long coastlines, beautiful beaches and a rich blend of culture and heritage." The difficult part about having intelligent readers is getting the balance right between providing clarity and sufficient explanation without insulting their intellect.
Different sections and subsections of the site
The website is filled with information on housing markets around the world. New researchers should be familiar with the site, its contents and limitations. Research into a country should basically start by reading the articles on that country in our site (it also helps the researcher to spot if certain parts of the website are already obsolete). I strongly recommend that a new researcher should read at least twenty country price histories and ten articles to get a "feel" of the site, and to educate themselves in the logic of our articles. Note: There are articles under Investment Analysis, and School of Profit.
Our data: definitions, assumptions and sources
This section is very useful in explaining the basic concepts used repeatedly throughout the site. Researchers must familiarize themselves with the contents of this section.
MODULE 2: FACTORS AFFECTING HOUSING MARKETS
As with any market price, equilibrium price is determined by supply and demand. If demand is rising faster than supply, then prices will rise. If supply is rising faster than demand, then prices will fall. Using this basic framework, we can analyse residential property price movements and determine (to a certain extent) its future direction.
Economic growth, wages, and employment
The most basic factor pushing housing demand is economic growth. This is a very basic and very central fact. As people get richer they want to live better, and they can afford to pay for more housing. Higher incomes, from higher economic growth, allow households to buy better, bigger and more housing units. As households move to better housing units, households belonging to the next income level fill the void they left, a process is called filtering. Take note that rapid economic growth is not always accompanied by wage growth and/or falling unemployment.
It is worth noting that one year of economic growth is typically not enough to push house prices up, or lead to as sustainable growth of house prices. Strong house price growth is typically seen in countries with sustained wage and GDP growth with falling (or low) unemployment.
A typically house is typically worth three to five times a household's annual income. In countries with extremely unaffordable housing, the cost can go as high as ten to fifteen times the average annual income. The availability of financing translates high income into higher demand for housing. House prices in countries with more developed housing finance markets tend to be more elastic to economic growth (more in module 3).
Greater availability of housing finance, deregulation of the mortgage markets, was a key factor in stimulating demand during the housing boom.
In the absence of housing finance, households have the following options:
- gradual construction (leading to housing that are unauthorized or un-conforming with building regulations; slum conditions)
- pay in cash (takes several years to accumulate sufficient funds, this may lead to crowding)
- pre-selling – pay for the house while it is still in planning or construction stage
Interest rates affect house prices through two major channels:
Low interest rates → Higher economic growth → Higher demand for housing
Low interest rates → Low mortgage rates → Higher demand for housing
These two main effects typically reinforce each other leading to a strong effect of lower interest rates on housing demand, especially in countries with more developed mortgage markets. This also highlights the importance of central bank's announcements regarding its key policy to the housing market.
The long period of low inflation and low interest rates which followed the successes of Paul_Volcker and Margaret Thatcher in combating inflation were key factors in the subsequent upward surge of house prices across Europe and the U.S.
The interest rate which is important is the nominal interest rate, not the real interest rate. If a buyer paying a nominal rate of 5%, uses 15% of his income to buy a property, and that may be OK. If the nominal interest doubles because of a rise in inflation, and the buyer finds himself spending 30% of his income on housing, that may be an unbearable burden, leading him to default on his mortgage loan.
This sort of problem is likely to happen more often in countries where mortgage loans are mostly floating rate, i.e., housing interest rates vary greatly when central bank policies change. These countries tend to have volatile housing markets.
However, there are cases when lower interest rates do not strongly affect house prices:
- liquidity trap case (interest rates at zero (or very near zero) and cannot be lowered further)
- underdeveloped mortgage and financial market
- housing market is dominated by buyers who are not affected by interest rates (cash-buyers, foreigners, etc)
The effect of inflation on house prices is still very debatable. Some argue that high inflation will lead households to move their wealth to assets whose prices are not eroded by inflation, such as real estate. Hence, at times of high inflation they would expect property prices to go up.
There are several problems with this argument. It assumes that there are sufficient number of people with sufficient cash lying idle in banks (or under their mattresses) who can buy real estate for cash. Underlying this argument is the assumption that these people can also readily convert their real estate holdings into cash, once the high-inflation period is over. But in most cases, countries with high inflation also experience economic or political problems, making real estate relatively illiquid.
According to empirical studies, house price growth tends to be negatively correlated with high inflation. Why might this be? High inflation (and the uncertainty surrounding it) tends to disrupt the normal planning process done by households. This may lead households to postpone their decision to buy a new or better house.
High inflation is typically addressed by central banks by raising interest rates. Higher interest rates tend to lead to lower house prices and housing activity.
Also, countries with high inflation typically experience high economic and political volatility and uncertainty. This can also lead to lower demand for housing.
Taxes and transaction costs
High costs may discourage property buying. There are recurring costs such as annual property taxes, monthly amortization for mortgages and maintenance costs. There are also one-time costs such as search costs, transaction costs and moving costs.
Transaction costs include all the costs added on the price of the property necessary for the transfer of ownership to happen, including the real estate agent's commission, registration taxes and costs, legal fees and other costs. Households also consider the capital gains taxes paid when they sell their property.
In many countries, the government adjusts property taxes, deed taxes, and capital gains taxes to spur housing demand. Some countries make mortgage interest payments tax-deductible as an incentive for home ownership. The general idea is that lower taxes tend to lead to higher housing demand.
Population and demographics
Population demographics can be important. A young population will lead to demand for starter homes. An aging population may lead to demand for retirement homes (Florida).
High population growth and urbanization do not always translate into higher demand for housing, especially if you have a huge informal sector. In most developing countries, these conditions lead to crowding, housing slums and illegal settlements. An individual property will definitely lose value if it is located in a slum area or next to illegal settlements, even if it is in a prime area at the center of the city.
However, on balance, population growth tends to increase demand for housing. High immigration in the UK and the US have helped propel housing demand. In Germany and Japan, a graying population combined with emigration has led to "dead" towns, especially in rural areas or former industrial zones.
Home ownership rates
It isn't clear whether there's a link between high ownership rates and long-term housing demand. Theoretically one or many of the following might happen:
High ownership rate → Low demand for housing (since households already own their homes)
High ownership rate → High demand for housing (since the pressure for ownership for new households is high)
High ownership rate → Higher demand for housing (since homeowners can use their property as secutity for a mortgage to allow them to move to bigger and better houses)
Foreign ownership restrictions
Housing markets that are closed to foreign buyers tend to have lower volatility. In times of housing downturns, demand from foreign buyers who are less affected by local economic pressures can lift the housing market into recovery. Although the additional demand can push prices up, it can also lead to volatility.
Foreign exchange rate
In some countries, housing transactions are done in another currency. In Latin America were currency crises are more common, real estate transactions in several countries are done using US dollar. The additional effect of the foreign exchange rate in housing adds complexities to the analysis.
In countries with huge overseas worker populations (like the Philippines, Ecuador and Guatemala), demand for housing tend to be sensitive to the foreign exchange rate. However, it is difficult to assess the exact effect of the exchange rate on house prices.
Sources of supply
There are three main sources of housing supply: existing homeowners who are re-selling their second-hand houses, property developers and the government. The different motivations between these sellers affect the responsiveness of supply to changes in economic conditions.
As mentioned above, there are two main types of home buyers, owner-occupiers and investors. A property investor would typically have a reservation price before selling his investment property, once this is met he will automatically sell a house. They carefully monitor house price cycles and time their buy or sell decision depending upon these cycles. On the other hand, a typical household would not sell their house unless the opportunity cost of not doing so is very high. Changes in household size, economic conditions (loss of job or promotion), and preferences are typical stimuli for them to sell. While they still consider the housing cycle in their decision, they are more responsive to their own economic needs rather than the macroeconomic environment.
Strong house price surges or anticipated massive demand may prompt property developers respond by constructing new supply. The capital-raising process tends to introduce a lag, as profits must become apparent before investors will buy developers' shares, enabling fund-raising for new building. Because of the time lag involved between planning, construction and delivery (typically involving a minimum of two years), developers must be careful in producing new supply. A sudden wave of new supply may depress house prices in general leading to losses.
Factors that may lead supply from property developers to be relatively price inelastic (i.e., not react much to rapid price increases):
- high interest rates and lack of financing;
- laws and regulations regarding building and zoning restrictions;
- high taxes (VAT, property tax, capital gains tax) and transaction costs;
- high construction costs in terms of inputs; and
- economic and political uncertainty.
Housing is typically used by a government as a tool for social and political goals. The construction of low-cost housing units can sometimes depress house prices within this price range. Governments also affect house prices through direct regulations and restrictions (see Module 4).
A note on rapid price increases:
I often encounter statements like this:
"Prices of real estate in COUNTRY OR CITY have risen about 20% over the past year, after rising 10%-30% during the previous year. Land prices have risen by 40% over the past year".
Given the massive price increases, should property investors be overly excited with the massive potential capital gains in that particular area?
The short answer is NO! The longer answer is, IT DEPENDS. Property buyers should investigate long and hard before they invest.
There are several possible reasons for reported massive price increases:
It is simply not true
Real estate agents and property developers are notorious for making hugely unrealistic claims. Huge price increases are cited without any data, calculations or careful thought. These numbers are picked out of thin air to create an artificial demand for the properties they are selling. Even of they cite sources, potential buyers should still be wary. Check the methodology and the credibility of the data source. If they are internal data, then these figures should be taken with a mountain of salt.
It started from a very low base
People with a basic knowledge of statistics should be familiar with this. When prices start from a very low base, then it is easier to achieve huge price changes. For instance, imagine two parcels of land. Both experienced a price increase of US$100 per sq. m. If property A started with a price of US$100 and is now priced at US$200, then an enormous 100% price increase was achieved. If property B is started with a price of US$10,000 per sq. m., then the price increase is a measly 1%.
It is a case of a property bubble about to burst
Enormous price increases were reported for several years in some newly industrialised countries in Eastern Europe. Due to the house price boom, prices rose to around US$2,000 to US$4,000 per sq. m. By the time investors were able to locate these countries from a globe and invest their money, the house price bubble bursts. Speculative investing is very tricky and the timing is very difficult. If you get the news from a newspaper or widely read blog, most likely the boom is at its tail-end.
It is an extremely isolated case
In some cases, the boom is only true for an individual property or a very particular area in a very specific time caused by a unique event (however, these events are the ones typically cited by property agents). For instance, the discovery of gold in a particular place or the establishment of new facility that is likely to draw in people. Again, speculatively investing in these areas should be done very carefully. Paraphrasing the greatest investor of all time, Warren Buffet, "Be careful (in investing) when everybody is greedy. Be greedy, when everybody is careful."
MODULE 3: MORTGAGE MARKETS, INTEREST RATES AND MONETARY POLICY
The sensitivity of housing market to changes in interest rates depends largely on the development and the features of the mortgage market.
Loan-to-value (LTV) ratio
The LTV ratio is the highest amount a homebuyer can borrow as a percentage of the property value. For instance, an LTV ratio of 80% implies that for a house worth one million pesos, a borrower can get PhP800, 000 from a bank or a lending institution. The higher the maximum LTV, the smaller a household has to put up as down payment (the easier and faster a household can buy a house).
Housing loan term (in years)
The loan term specifies the number of years the entire loan will be paid. The longer the loan term, the smaller the monthly amortization is.
Initial rate fixation (IRF)
The interest rate for housing loans is typically fixed initially. The common IRF are:
- Floating rate → adjusted monthly
- Variable rate → adjusted annually, semi-annually or quarterly)
- Fixed rate → interest rate is fixed for 5 years or more or for the entire loan term (in the US for as long as 30 years, which the typical loan term)
- Mixed rate → in several countries features of variable and fixed rates are mixed, e.g. fixed for the first 3 years then adjusted annually or monthly afterwards
The typical IRF of housing loans affects the sensitivity of the housing market to changes in interest rates. Countries where floating or variable rates are dominant are typical more sensitive compared to countries with fixed rate housing loans.
The term IRF is not yet universally adopted, and should really be used infrequently. In many countries, loans with interest rates fixed for one year are called fixed rate loans. In some, adjustable or variable rate mortgages have interest rates adjusted monthly while in some they are adjusted annually.
Size of mortgage market
Countries with larger mortgage markets are more sensitive to changes in interest rates. There are two main measures in comparing the size of mortgage markets:
- outstanding housing loans in monetary terms (dollars, euro or whatever currency); and
- mortgage to GDP ratio – calculated by dividing the total outstanding housing loans by the current GDP level. This measure captures the relative size of the mortgage market. Countries with a huge population tend to have a bigger mortgage market in absolute monetary terms. To correct this bias, we can use the mortgage to GDP ratio.
Secondary mortgage market
Mortgages sold to households can be bundled, securitized, and sold as mortgage-backed securities (MBS). The secondary mortgage market is where banks and financial institutions can get more funds that can be lent further to households. Countries with developed secondary mortgage markets are more sensitive to changes in interest rates.
Interest rates and mortgage rates
In most developed countries, interest rates on housing loans are linked or tied-directly to the key interest rates set by the central bank. In these countries, monetary policy is more powerful in stimulating (or depressing) house prices. In some countries, the housing loan rate is tied to interest rates not controlled by the central bank ((for instance in the Philippines, housing loan rates are tied to the treasury bill rate)
Interest rates and foreign exchange rates
Countries with fixed exchange rate adopt the interest rate (and monetary policy) implemented by the currency to which the domestic currency is pegged to. For instance, currencies pegged to the US dollar such as the Hong Kong dollar and all the Gulf currencies (Saudi Arabia, UAE, etc) adopt the key rate set by the US Fed.
The foreign exchange rate also affects the domestic interest rate. In a country with a floating exchange rate, higher supply of foreign currency will lead to a lower exchange rate (domestic currency depreciates), and eventually domestic interest rates will fall.
MODULE 4: TAX CREDITS, HOUSING SUPPLY AND OTHER GOVERNMENT INTERVENTION
Since housing is a basic human need, most governments directly or indirectly intervene in the housing market. The interventions through fiscal policy (spending and taxation) are intended to boost demand or increase supply. In certain cases, policymakers were even surprised on the effects on house prices of their actions.
Many countries implement policies intended to boost homeownership. Some believe that homeownership boosts economic growth especially in developing countries. Singapore's Lee Kuan Yee said that when renters become homeowners they tend to work harder and take care of their surroundings better.
In most cases, owner-occupied houses are taxed lower compared to houses intended for rental, vacation or investment. In many countries, mortgage interest rate payments are income tax deductible. First-time homebuyers are also given grants and subsidies for down payment or amortization.
Many economists argue that too many homeownership incentives, to the detriment of the rental housing sector, thwart the development of a vibrant housing and rental market responsive to the needs of different types of household. Rental housing can be viewed as a complement rather than substitute for home ownership. Younger households who are generally more mobile vertically and horizontally may wish to rent initially before settling on a place to buy a property. The availability of free-market rental property makes it easier for workers to move, following structural shifts in the economy.
Housing construction programs
Government housing programs are typically intended to supply housing units for low to middle-income households. Motivations for these programs vary from "housing as a basic human right" to populist programs (wherein followers, relatives and supporters of the rulers are the recipients of the housing units).
Even in the absence of government corruption, housing programs can distort incentives to the detriment of other uses of land. The government with its right of eminent domain can expropriate land to use for its housing programs. The use of a certain plot of land for low-cost housing may not yield the highest social or economic returns.
Governments often set up building restrictions to ensure public safety. Minimum requirements for size of rooms, easement, and provisions (of elevators, stairs, etc) are intended to provide comfort. In earthquake prone areas, restrictions on the maximum height of buildings may be in place (the strength of the building's foundation may also be regulated). In some cases, the government put stricter building restrictions to control or depress house prices in certain areas.
Although intended to provide public comfort and safety, excessive restrictions can choke supply.
Areas are often classified into type of use such as residential, commercial, industrial or agricultural. By converting a certain area from agricultural to residential, the government can increase the amount of land available for subdivisions. Building restrictions are often tied to zoning limits. For instance, high rise apartment buildings and condominiums are often not allowed in residential areas. Very strict zoning restrictions can also choke up supply and force developments outward to suburbs.
Other government interventions
Other types of government interventions that affect the housing markets directly or indirectly include:
- house price controls
- rent control
- infrastructure projects such as roads and bridges
- mass transport systems, airports and sea ports
Both rent control and house price controls are very negatively viewed by most economists. Housing is not built and placed in the hands of strangers out of the goodness of developers' hearts, it is built and/or rented for profit. Reduce the profit and you reduce the quantity of housing provided. "Short of an aerial bombardment, the best way to destroy a city is through rent control", said Swedish economist named Assar Lindbeck, ironically a socialist.
Rent control policies fail to achieve their intended goals:
- The price of any good or service in a free market economy reflects the changing dynamics of the supply and demand.
- When a binding price ceiling is introduced (eg. rent control) the price does not reflect the needed equilibrium price where the value of the good or service is worth the same to buyers as it is to sellers.
- Landlords do not realize their full (not necessarily deserved) income potential, and in turn renovate and build less property. Supply takes a downward turn. At the same time, when a binding price ceiling is introduced, the buyers who would previously have been deterred by the high equilibrium price, flock to purchase the cheapened product. Demand goes through the roof.
- The combination leads to a shortage and results in landlords becoming very creative with their renting practices. They take key money, discriminate on any basis, and poorly maintain the properties because there is no incentive to spend money maintaining or upgrading when people are already filling waiting lists for the existing deteriorating conditions
MODULE 5: HOUSING VALUATION, FUNDAMENTALS AND BUBBLES
Detecting housing bubbles
A house price bubble is often characterized by rapid house price increases over and beyond what fundamentals would allow. There are several reasons why the housing market is more prone to price bubbles compared to other assets. The main is the cyclical nature of housing market due to demand surge combined with inelastic supply. The relative difficulty in liquidating housing investments also adds to the problem.
What causes house price bubbles? Keynes attributed it to animal spirits. In some cases, housing fundamentals may lead to strong house price increases. News of continuous strong house price increases may attract speculative investors into the market.
The challenge to housing economists is attributing the house price increase to either fundamentals or speculation. In cases where both types of demand are present (which is the most common case), it is almost impossible how much is caused by fundamentals and how much by speculation. Housing economics, like most economics, is not an exact science.
There are several yardsticks used to check whether a housing market is generally overvalued or undervalued.
Housing affordability – if house prices are relatively unaffordable compared to other areas or other time periods, then, it must be overvalued. Measures used to compute affordability include median house price to income ratio and median rent to income ratio. Comparing the level of median house price to income ratio to the average for the past five years can show a trend of rising or falling affordability with respect to income.
Rental yields – since the rental yield is computed by dividing annual rental income by the property value, it actually shows the ratio of rents to property prices. If rents are rising faster than property values then rental yields will rise, this may indicate an undervalued housing market. However, always check the landlord-tenant conditions and the country's tenure system before making any conclusion.
Bursting or deflating bubbles
Central banks, academics, policymakers debate whether central banks should burst, deflate of prevent property bubbles from forming. A bursting property bubble can lead to disastrous consequences to the financial market and the public in general (as the cases in Japan and the US showed). The question faced by the central bank is not whether they respond at all to house price movements but whether they respond over and above the response called for in terms of objectives to stabilize inflation and employment.
There are three main issues
- How to detect a how price bubble?
- Why should central banks intervene in specific asset markets?
- How to deflate house price bubbles?
There is no consensus on answers. Before the crisis, central banks tended to feel that attempting to prevent an apparent bubble (by increasing interest rates) often led to more problems than it cured. For instance, Frederic Mishkin, then governor of the US Fed, argued that to delineate a special role for asset prices in the conduct of monetary policy required that three key assumptions should be true: 1) that a central bank can identify a bubble in progress; 2) that monetary policy cannot appropriately deal with the consequences of a bubble burst, and so preemptive actions are needed; and 3) that the central bank knows what monetary policy is needed to deflate the bubble. He warned that:
"The serious doubts about each of the three assumptions needed to justify a special monetary policy to focus on house prices constitute a strong argument for monetary policy makers to instead maintain their efforts to stabilize inflation and employment without such as special focus"
Post-crisis, the balance of opinion has changed, though ironically the post-crisis stimulus has tended to inflate, not reduce, the housing bubble. Certainly many central banks intervene heavily on housing markets and raise interest rates when they suspect that speculative demand is driving up house prices. They think that is unreasonable to completely ignore the risks arising from long periods of high growth rates in asset prices and debt that appear unsustainable in the long run.
Supporting this view, the authors of the International Monetary Fund (IMF)'s April 2008 World Economic Outlook article on "The changing housing cycle and the implications on monetary policy" suggested that in countries with more mature mortgage markets, where transmissions mechanism are more pronounced, "monetary policy makers may need to respond more aggressively" to movements in the housing market. This can be done, they suggest, within a risk-management approach that includes house price dynamics as one of the key variables in evaluating the balance of risks to inflation and output.
At the Global Property Guide, there is no consensus on these issues. Matthew was in favour of proactive Central Bank intervention, to keep key house price ratios within a sensible range, but notes the recent disastrous attempt of the Swedish Central Bank to do just this, which aborted the Swedish recovery. So perhaps, the answer is that monetary and fiscal policy are not appropriate, and that other housing market regulatory measures should be used).
In judging whether a market is overvalued or not, The Economist's charts are useful http://www.economist.com/blogs/dailychart/2011/11/global-house-prices. We can use these charts in our content.
MODULE 6: EFFECTS OF POLITICS, CULTURE AND HISTORY ON HOUSING MARKETS
The housing market does not exist in a vacuum. It is sensitive to social, political, historic and economic developments. In some cases, the effects of these variables on the housing market are not very obvious and may need scrutiny.
Uncertainty regarding the economy raises the cost of doing business and makes planning for homebuyers and investors difficult. There several signs that a country is heading for economic disaster:
Hyperinflation, commonly defined as inflation reaching 50% to 100% per month is definitely disastrous for the economy and for the housing market. Inflation over 10% for a prolonged period may be considered as high, but there are no general rules.
Persistently high inflation may be caused by excessive spending financed by printing of money (see budget deficit), lack of access to key economic resources (such as oil, food and other commodities) or government policies that lead to both. Uncontained high inflation often leads to popular revolts and mass actions that make the situation worse for the housing market.
If inflation is bad, deflation may be worse. Deflation, the opposite of inflation, is the decrease in overall price level. Deflation is mainly caused by very weak consumer sentiment, often due to an economic recession. Falling prices may lead households to expect prices to fall further in the future, thereby postponing their consumption. Their actions may lead to further price falls leading to a vicious circle of falling prices, sales, and employment.
When the government's expenditures exceed revenues (from taxes, custom duties, earning and various fees), it will incur a budget deficit. A budget deficit can be financed by borrowing, printing of money or both. Printing of money leads to inflation which we already discussed. Borrowing from the public, domestically or internationally, tends to push interest rates up and crowds out private investment.
If the debt is unsustainable, this can lead to very high domestic interest rates (which constricts private investments) and government default (wherein the government suspends or cancels debt and/or amortization payments). A default can lead to the collapse of the financial system and widespread economic hardship.
Current account deficit
The current account is the sum of the balance of trade (exports minus imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as foreign aid).
Large current account deficits are common before financial crises. In a pure trade terms, a deficit implies that an economy is spending more on imports than what it is earning from imports (a net loss of a country's wealth). While this not necessarily bad in the short run, persistent current account deficit is definitely unsustainable. A current account deficit is often accompanied by high budget deficits.
The housing market is relatively sensitive to political uncertainty. Definitely dangerous for the housing market is a socialist politician who threatens to abolish private ownership and confiscate lands and real estate owned by foreigners and wealthy individuals.
Most damaging to the economy and the housing market are cases of political instability associated with wars, coup d'etat, popular uprisings, and military takeovers. The lack of legitimacy of the actions of an unelected government often leads to a sharp contraction in business and consumer activity. In some cases, these political issues lead to popular uprisings, crippling government functions (a good example is Thailand) and damage the economy and the housing market.
Protection of property rights
Inadequate protection of property rights imply that full returns on the investment will not be captured by the investor, leading to underinvestment.
Several factors affect the adequacy of property rights protection:
land titling system – a system where potential homebuyers and current homeowners can check and verify ownership of their real estate, protecting property rights. In some countries, the process of registration is cheap, quick and efficient. In most developed countries, the system is fully computerized and verifiable through GPS. In some countries, land title insurance is available to minimize the risk for duplicate or conflicting property titles.
efficiency and fairness of courts in settling disputes
Ownership disputes regarding real estate are sometimes unavoidable. The quick and cheap resolution of these disputes is expected to enhance the proportion of rights. Uncertainty associated with a long and expensive trial reduces the returns to property investment.
government's view of private ownership
The government's perspective regarding private ownership often leads to the enactment of laws and regulations that promote the protection of property rights.
MODULE 7: WRITING (PRICE HISTORY AND OVERVIEW) FOR WEBSITE
Writing is a skill. After doing your extensive research, your thoughts must be organized in a coherent manner so that others can read and learn from it. Writing for the Global Property Guide requires storytelling. There are characters and events that must be tied to a general plot. Since writing is a skill, it can be improved with practice and patience.
Balancing analysis with readability
Writing an article for the internet is more challenging than writing a college essay or a blog. Internet readers are easily distracted and you must be able to hold on their attention. However, avoid using colorful descriptions and brochure-type statements to keep the readers interested. Readers go to our site for information, data and analysis. A delicate balance between readability and analysis must be struck.
Length of sentences and paragraphs
To keep the articles readable, avoid sentences that include more than two or three clauses. Always try to summarize the sentence into subject and predicate, and then add the descriptions, qualifiers and explanations later. Avoid kilometric sentences that try to fit an entire story into one straight sentence. As an exercise, try not breathing while reading a sentence. If it cannot be contained in one breath, you can probable cut it into two or three.
Paragraphs, especially in the introduction part, should not exceed three to four sentences. Huge chunks of black text look boring and intimidating on websites.
Use of words, terms and jargon
In general, we use British English. Economic terms such as GDP, inflation, interest rates can be used even without formally defining them. Economic jargon can be used even if a common word for it exists, just avoid extreme repetition.
For house prices and similar concepts such as the key interest rate, it will be helpful to state the exact term on first use. For instance, if house prices refer to "the average price of owner-occupied houses", then it must be mentioned. Sources of information, sentiments and data must be mentioned and hyperlinked, as much as possible.
It is okay to say that there is no data or admit that it is "difficult to verify the accuracy of claims by real estate agents". If the data show conflicting or mixed results, then you must discuss these conflicting figures. As mentioned, economics is not an exact science.
Formalism and passive sentences
News articles are generally written in active voice while academic articles are generally written in passive voice. Since we are trying to strike a balance between the two, then it is generally okay to use both. It is actually difficult to write in active voice when dealing with economic concepts and terms.
Always write from in third-person narrative; no "I" or "you" on write-ups except for direct quotes.
The level of formalism is also somewhere in between. If you are too formal, you may sound dry and boring. If you are too informal, you may end up like a gossip paper.
Graphs and illustrations
Graphs are useful because it breaks the monotony in a page and it shows a general picture that can take sentences to describe. Graphs should complement the text, not replace it nor overshadow it. Some general notes on the use of graphs:
- do not overuse graphs to the point that there is a graph for every paragraph
- do not load too much data on a graph (a twenty-year quarterly figures may be too much if the information you need can be shown by five years worth of data)
- do not put too few data (if you have only data for two periods, it may not be worth putting in a graph)
- do not make a graph that is self-explanatory (if you include all the notes, legends and figures, the graph may end of too crowded that it is difficult to read)
- do not make a graph that does not say anything (it must contain basic trends, labels and title, i.e., if the exchange rate is fixed you should not put a graph showing an unchanging exchange rate for ten years)
Writing the Price History
You are now done doing research and are ready to write or update a price history article. What would you do next?
- Read the current price history article.
- Update the figures and statistics.
- Check if the overall story or flow has changed. Is it now a recovery phase? a boom phase? Or a crisis phase?
- Edit the article following the overall theme or flow. Always remember your plot.
- Pick only the most important sections of the economy that are likely to have the biggest impact on house prices.
- Write an introduction. Typically, it is self-contained. If readers will only read a small part of the article, then he must be able to get the general picture in the introduction. I include the latest price movements and events, its main causes and a paragraph on its future direction.
- Write the body. I typically include segments for the mortgage market, the government and politics, the overall economy, rental market and yields, and recent market changes and developments. The write-up should not sound like an economic briefing released by the central bank or finance ministry. Choose only the most important data and segments.
- Choose a title that will summarize the over-all theme. Titles must be short and not contain a narrative, contradiction and conclusion in one. Since titles appear on the homepage, it should contain the name of the country. Titles that are too generic such as "Strong house price growth in Timbuktu" should be avoided. Avoid titles that are too similar with other countries, for instance "Massive house price growth in Tuvalu". Be creative.
- Conclusions are not generally required. Newspapers generally follow an inverted pyramid style with the most important sections on top. The main idea is that the article can be cut anywhere in the middle without loss of very important details. The same format can be adopted for a website. We cannot assume that our readers will always finish the article; hence, the most important sections must be discussed first.