Cluster Family Office Blog

Flats at 1970s prices

As for the real estate market, today we bring you a very simple yet revealing graph of the state of the US real estate market. But what is really clarifying is the comparison we can make with the data and experiences (since the official data here can distort the reality) of the Spanish real estate market.

As you can see in the graph, the grey areas correspond to the years in which house prices have fallen by more than 5%, something that only happened on rare occasions before the credit and housing bubble from 2007 onwards. Logically, we see the median house prices in the US as a whole, discounting official inflation in those years.

At a glance and with a very simple graph we can see that the current level of real estate prices, deducting inflation, corresponds to what we could find in 1990, 1985 and even in 1977! Yes, yes, homes made in the USA today are worth on average the same as what American families of our parents' generation could afford.

Comparisons with what has happened in the Spanish real estate market are odious for several reasons. For one thing, housing prices have not fallen nearly as much as in the US market. Our banks, full of foreclosed, falsely non-foreclosed and imminently foreclosable homes, would not materially withstand a fall in prices to their real value level. And the fact is that paid property owners who do not need to sell are not putting their properties on the market, as we are coming from such exorbitant prices that they prefer to believe that the incipient drop that has occurred in the last 3 or 4 years is only a temporary effect and that the abusive prices of 2006 or 2007 will soon be recovered. Big mistake. But the fact is that it is not in the interest of Spanish banks and property holders without financial difficulties for the market price to adjust accordingly. Here, we prefer to delude ourselves into assuming losses in real estate value, and prices are adjusted very, very slowly, so that the balance sheets of banks and other companies that hang by a thread do not look manifestly bankrupt. The Spanish financial-accounting system cannot afford this.

On the other hand, inflation in Spain over the last 30 or 40 years has been calculated less reliably than in the USA, especially during the period of the end of Franco's dictatorship and the subsequent transition, when we started out with very precarious State statistical tools that distorted the reality of the longed-for peseta. All this, together with the runaway inflation of those years, and the socio-economic awakening of the SEAT 600 generations and the real estate boom of the time, make it difficult to compare what happened to the US housing market (graph) with the Spanish market also from the 1970s. But nevertheless, it is clear that many families here would like to see average house prices at levels of what their parents could afford when they were just babies or mere future projects. Many would claim today that with the same effort their parents made, they could afford to buy a home in Spain. With all the effort that this entailed for their parents, but which many families managed to make a success of. Because unfortunately, the generation that grew up playing between car and flat purchase, today cannot repeat that feat of going from working class family to owners of a small flat and 600, not even with an effort that perhaps some would not even be willing to make (that's what a well-off childhood is like).

Finally, you can see that housing price increases, as a percentage of housing prices, stopped being negative or going back to zero from the 1990s onwards. This caused a bubble effect that the wealth of American society has not been able to withstand. The adjustment is therefore more than evident in the US market, and it may still take a few years to see the percentage in the graph punctually above zero. However, it is very healthy to see the excesses of the 1990's being purged with sustained declines of over 5% per annum (grey area in the first chart). Let us hope that we never return to graphs like this one, with sustained and above-average growth, as was the case from 1990 to 2005. Because household wealth creation will hardly ever accompany such growth, if we properly discount inflation, in the developed world.

These falls, accompanied by an aggressive devaluation of the USD against other currencies such as the EUR, have had a medicinal effect on the real estate market. It is now very common to see Russian, Chinese, Arab, Indian and European investors in general buying real estate in the USA, thus helping to balance their offerings with eager demand for depreciated properties to be paid for with depreciated currencies.

The reflection we should make is that Europeans are looking at real estate on the other side of the Atlantic basically because of the interest of the EUR/USD exchange rate, since in general we are very, very far from generating hordes of new rich people with the capacity to invest, unlike what is happening with economies such as those mentioned above in the Middle East, China, Russia or India. Perhaps as long as we have a sky-high Euro, we should take advantage of it for all it is worth. Because at these levels, the only thing that an expensive € is achieving is that other economies are putting their foot down on ours, while at the same time we appear to have the same investment capacity as the nouveau riche emerging economies. But our mirage will end when our single currency ceases to be unique and/or overvalued. And then a real potential economic recovery will begin. Let us hope it is not too late. Until that happens let us make intelligent use of the fact that we have in our hands a currency, for which the world gives us much more than it is really worth., at least for peripheral Europeans.

Via: Chartoftheday.com

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