REAL ESTATE PRICES ON THE UPTICK
The McKinsey study found a strong inverse correlation between net worth relative to gross domestic product and five-year rolling averages of nominal long-term interest rates.
The authors believe that declining interest rates have played a decisive role in lifting asset prices of all sorts, but particularly real estate prices.
Constrained land supply, zoning issues and over-regulated housing markets also helped push up values. The result is that home prices have tripled on average across the 10 countries.
The ramifications are troubling. For starters, asset values are now nearly 50 per cent higher than the long-run average relative to income. Net worth and GDP have traditionally moved in sync with each other at the global level, with some country-specific deviations.
Now, wealth and growth are completely disconnected. This is, of course, behind much of the populist anger in politics today.
Affordable housing in particular has become a rallying cry for millennials who can’t afford to buy homes and start families as early as a previous generation did.
That, in turn, generates a headwind to consumption growth, since they aren’t buying all the things that you put in a house, either. But it also fuels inflation in rents, since so many people can’t afford to buy. That supports the idea that we could be heading into a 1970s stagflation era.
Much of the disconnect between wealth and growth stems from too much money in real estate. But another aspect of the problem is that there’s just not enough money moving into more economically productive places.
While higher asset prices accounted for about three-quarters of the growth in net worth from US$150 trillion in 2000 to US$500 trillion in 2020, savings and investment made up only 28 per cent of the increase in balance sheets.
Given that investments such as infrastructure, industrial equipment, machinery and intangibles are what actually drive productivity and innovation, that’s very bad news.
For all the latest world News Click Here
