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Business News/ Opinion / Online-views/  Sanity is unaffordable
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Sanity is unaffordable

Sanity is unaffordable

Newly built luxury townhomes are offered for sale in Woodland Hills, Calif. APPremium

Newly built luxury townhomes are offered for sale in Woodland Hills, Calif. AP

The Demographia International Annual Housing Affordability Survey (https://www.demographia.com/dhi.pdf) with data up to the third quarter of 2011 was released recently. The report does not cover many important housing markets in Asia such as Singapore and China, let alone India. It only includes Hong Kong. Otherwise, it looks at the US, the UK, Ireland, Australia, New Zealand and Canada. Before we delve into the findings of the survey, a statement by the authors of this report captures most of what has gone wrong and continues to remain wrong with the world of finance:

As housing affordability has deteriorated, there has been a tendency on the part of housing industry and financial market analysts to “cheer on" abnormally high house price increases as if housing were a commodity market, like gold. Housing is much different. It is a basic necessity and adequate, comfortable housing is necessary for a decent standard of living. The performance of the housing market is thus not genuinely measured based on price increases relative to other investments. The genuine measure of a housing market’s performance is the extent to which it remains affordable in a well-functioning metropolitan economy.

Newly built luxury townhomes are offered for sale in Woodland Hills, Calif. AP

Home prices in the UK, with its floundering economy, are still seriously or severely unaffordable. That is the lesson in building up a reputation. It is hard to build one and, once built, it stays longer than deserved. London enjoys (or suffers?) that reputation and, hence, homes in the British capital remain sought after and well bid for. However, far from helping the UK economy, the inelasticity of home prices to economic prospects will delay its economic recovery, exacerbate the income and wealth divergence in the years ahead and presages several years of decline in home prices.

Housing may already be very affordable in many parts of the US, but that is no insurance against further price declines. Some may scoff at this as, after all, the US Housing Market Index, a measure of confidence among home-builders, has been rising steadily in recent months. But the confidence of many economists on the prospects for a lasting economic recovery in the US borders on chutzpah. Growth in real personal disposable income has crawled to a stop. Disposable personal income includes government transfers. Without that, the situation might be worse.

Despite this situation, real personal consumption expenditure continues to rise to the utter detriment of the household savings rate or improvement in the household balance sheet situation. But, once again, swords are being sharpened for another attack on policy prudence. The falling rate of inflation, as measured by the official Consumer Price Index, is a useful pretext for the US Federal Reserve to fire another round of quantitative easing to further cement the “economic recovery". Importantly, the position of the US as the world’s supreme leader in monetary debasement is under threat from Europe’s Mario Draghi. The intellectual cul-de-sac that characterizes much of American policymaking and cheerleading by Wall Street economists would still prove to be America’s undoing this year and next.

Australia has hitched its economy to real estate and to China with the latter driving the former. The feel-rich effect created by booming home prices has driven consumption and investment by households beyond their income and savings, respectively. Hence, Australia runs a sizeable current account deficit year after year. A country with a rising current account deficit normally sees its currency depreciate (ask India and South Africa about their currencies in 2011). However, in the case of Australia, a strange logic is at work. Even as the Reserve Bank of Australia looks set to cut rates, investors continue to flock to the Australian dollar because of the perceived resilience of the Chinese economy and, hence, of its import of commodities from Australia. What investors really see in the Australian dollar is a hard question to answer.

China’s gross domestic product growth estimates are too smooth to be real and too inconsistent with other pieces of macroeconomic evidence from the country. Yet, posing questions is fruitless since very few wish to provide or hear honest answers. When investment returns are to be made from worshipping the monotheistic god of liquidity, there is no place for pagan polytheism of economic fundamentals. Vision is a hindrance when intellectual blindness is near universal.

This can end only one way: housing would become more affordable in the markets that Demographia surveys, including the US. The path from here to there won’t be a straight line, but will include many false starts in financial markets such as the one we are experiencing now.

V. Anantha Nageswaran is a senior economist with Asianomics. These are his personal views. Comments are welcome at baretalk@livemint.com

Also Read | V. Anantha Nageswaran’s previous columns

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Published: 23 Jan 2012, 09:26 PM IST
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