real house price growth - the perception that investors and buyers get real house price growth; i.e. returns must be higher than nominal inflation; hence the GDP growth prospects and financial balance sheet for the country must be "good-strong"
Australia's Plate Of Worry
size of the existing housing stock - self-explanatory; however the more vibrant a city's economy which will attract the better rental market, is another important supporting factor
nominal interest rates - self-explanatory
These 4 main factors may have explained much of the price growth from 70s-2000. However, there are two major factors unaccounted for, which may further explain the present stratospheric property prices:
a) the hyper-liberal ways developed nations have been printing money to get themselves out of the few financial crisis
b) the enormous wealth created in China by the middle class
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Residential investment and economic activity: evidence from the past five decades
BIS Working Papers | No 726 |
06 June 2018
BIS Working Papers | No 726 |
06 June 2018
The paper studies the evolution and key drivers of residential investment in 15 advanced economies since the 1970s. It also analyses how residential investment growth affects overall economic activity and the likelihood of recessions.
Contribution
Most previous research on housing markets has focused on house prices, whereas research on housing quantities - ie residential investment - has been scarce. There has also been little cross-country analysis of the determinants of residential investment. This paper partly fills this gap. It studies the key drivers of residential investment across countries and the impact of residential investment on the broader economy. We provide novel evidence on the effects of monetary policy on the residential investment cycle, highlighting the asymmetric effects of rising and falling interest rates.
Findings
We find that the key drivers of residential investment in advanced economies are house price growth, net migration, the size of the housing stock and nominal interest rates. Importantly, rising interest rates have stronger effects on residential investment than falling ones. This could result from downward rigidity in house prices, which forces housing construction rather than prices to fall as interest rates rise. We also show that declines in residential investment are a good predictor of economic recessions.
Abstract
We analyse the evolution and main drivers of residential investment, using a panel with quarterly data for 15 advanced economies since the 1970s. Residential investment is a notably volatile component of real GDP in all countries in the sample. We find real house price growth, net migration inflows and the size of the existing housing stock to be significant drivers of residential investment across various model specifications. We also detect important asymmetries: interest rate increases affect residential investment more than interest rate cuts, and interest rate changes have larger effects on residential investment when its share in overall GDP is rising. Finally, we show that adding information on residential investment significantly improves the performance of standard recession prediction models.
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Many countries have tried to contain the price surges, from the UK, to Canada, to major cities in China, to Hongkong, to Australia and even New Zealand. Finally, I think Singapore has come up with the most brutal and (possibly most effective) policies to counter the price bubbles.
ABSD Changes (Singapore)
| AS OF JULY 5 | FROM JULY 6 | |
|---|---|---|
| Singaporeans buying first residential property | 0% | 0% |
| Singaporeans buying second residential property | 7% | 12% |
| Singaporeans buying third and subsequent residential property | 10% | 15% |
| Permanent residents buying first residential property | 5% | 5% |
| Permanent residents buying second and subsequent residential property | 10% | 15% |
| Foreigners buying any residential property | 15% | 20% |
| Entities buying any residential property | 15% | 25% (plus additional 5% for developers) |
The curtailment for local investors are quite tough but the taxes on foreigners are now quite debilitating. Other countries should try the Singapore way. It is a determined way to quash sentiment.
