Boring is good: A global view of the housing bubble
Unusually for me, a short post on property on the back of this great illustrative graph from McKinseyQuarterly.
These graphs are general to the point of being useless and regional differences remain stark. As a personal example, I sold my house in London in July of last year (check it out on Zoopla), just as the market was shutting down and subsequently bought a house in Switzerland; a lucky escape. It is surprising to me that the Swiss market is depicted as not having really budged that much despite the fact that a decent house anywhere between Geneva and Montreux will probably set you back CHF 3M. I also happen to be from Brussels where €1M still buys you significant property, in spite of the runaway performance highlighted on the graph. So there are catchup effects and areas where access (the Lemanic region being the classic example) guarantees sustained prices.
The core lesson for me in this crisis was learned through the eye-opening process of borrowing in Switzerland to buy the farmhouse: only about 20% of people own a house here, and to get one is tough: leverage ratios will rarely exceed 66%, the appraised value on which the ratios are based takes a significant haircut from the assessed or market value, and there are harsh assumptions made on maintenance costs (5% per annum) and where floating interest rates might go. Al these factors contribute to much more difficult access to home ownership. On top of that, most people do not really care about owning a house at all.
Compare and contrast to the UK where equity release to buy consumables became the thing to do, and where one felt like home gym and home cinema were commodities one could not function without. Now we are into forced savings and no hope of a consumer led recovery, a textbook case of unsustainable wealth creation.
What we need is for most people to take luck out of the equation but go for long-term, suitably defensive value creation methods based on reasonable appreciation of their assets and gradual increases in wealth. A world where everyone thinks they can be Warren Buffett, Bill Gates, win the lottery and generally hit it lucky is not a healthy one. Boring is good. As Taleb would say, don’t confuse luck with talent.