The great divide: Why American house prices have corrected more than those in Europe

(From the economist.com) Andrew Mellon, Herbert Hoover’s treasury secretary, advised the president to “liquidate real estate” as part of a plan to “purge the rottenness out of the system”. Eighty years later, America has pretty much followed his advice. House prices have lost nearly all the real gains they notched up in the bubble period (see chart). That makes for a marked contrast with Europe, where prices may be off their peaks but have not lost all their real gains. Why the difference?

Many people think that owning a house is a certain moneymaker, but this is not the historical experience. In his recent book “Safe as Houses? A Historical Analysis of Property Prices”, Neil Monnery presents data from an array of nations going back (in some cases) several centuries. What he discovers is that real house prices have generally been flat over time, or have increased by at most 1% a year. Rather like gold, then, house prices have been a good store of value rather than an automatic route to riches.

The exception is the period of the past 15 years or so, when real house prices took off in a few countries. But not everywhere. In Germany and Switzerland the trend has been flat-to-lower. In Japan there has been a decline which has pretty much wiped out the rise in house prices that occurred between 1970 and 1990. So there are really three types of market to explain: America and Japan, where real prices rose sharply then corrected; those where they rose sharply but have yet to lose all their gains; and those where the markets have been flat in real terms.

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