It is not your parents world. In case you hadn’t noticed the economic power in the world has been changing quickly. Many are missing the magnitude of these changes. One visible example is explored by the Economist in Emerging-market Multinationals:
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By 2006 foreign direct investment (including mergers and acquisitions) from developing economies had reached $174 billion, 14% of the world’s total, giving such countries a 13% share (worth $1.6 trillion) of the stock of global FDI. In 1990 emerging economies accounted for just 5% of the flow and 8% of the stock.
This is just one visible sign of shifting economic power. And it shows no sign of slowing down. Our 12 Stocks for 10 Years portfolio is heavily invested for overseas growth. Close to 20% directly in emerging markets (through Templeton funds). PetroChina, Google, Toyota and Tesco all are very well positioned to grow quickly in emerging markets. And other stocks are likely do do well too – I am not clear on how well Pfizer, Amazon and Dell are positioned at this time.
Emerging stock markets will continue to be very volatile I believe. However looking decades out and at a pool of 20 countries it is hard to imagine they won’t do very well: China, Singapore, Mexico, India, Thailand, Brazil, South Africa, Vietnam, etc.
Related: Growing Size of non-USA Economies – Why Investing is Safer Overseas – South Korea To Invest $22 Billion in Overseas Energy Projects – Changing Economic Clout and Science Research
One way to evaluate the real estate market is to compare rental rates to home values. This can provide a comparison of an approximate cost of buying a house versus the cost to rent. As the ratio of monthly rent to home price increases, at least on this measure or real estate value, the market can be seen as becoming more expensive.
Several points to keep in mind:
- This does not take into account things like tax rates (in higher tax areas the rents will be higher [since the owners will pass on that cost that is not reflected in the home price] – the ratio lower)
- This is only a comparison measure – it can be that rents also experience a bubble. So if rents experience a bubble then the ratio could stay low and fail to indicate an “expensive” market.
- Don’t rely on one measure – this is one useful measure there are plenty of others that matter for real estate prices (income levels, job growth, interest rates, zoning regulations…)
The Rent-Price Ratio for the Aggregate Stock of Owner-Occupied Housing
likely would have to fall considerably.
This paper is well worth reading. I would like to point out another factor here though. When those investing in real estate were focused largely on capital gains (say a few years ago) there could well have been an increased demand for rental property (which increased prices). That effect also moved extra supply into the rental market (that previously would have been sold to owners that would live there instead of investors). Those investors were more concerned with capital gains and it seems to me could well have been willing to accept lower rents just to have some cash coming in to help pay the expenses.
As those investors no longer believe they will receive large capital gains in the short term it is possible they will be more focused on cash flow – and seek increased rents. I will not be surprised that rent prices increase as investors focus more on cash flow and stop assuming such large capital gains will be where their profits are made. Thus the ratio will close both by real estate value declines and rental price increases.
Related: Explaining Rent-Home Price Ratios – True Rent-to-Price Ratio for Housing – articles on the real estate market – Real Estate Median Prices Down 1.5% in the Last Year – Rent Controls are Unwise
I have noticed that many of the stories I read and heard lately, about economists work, is not exactly what you would expect: Randomization in Sports, Violent Films May Drive Down Crime Rate, Study ties dropouts to violent crime rate, Seat Belts Still Best Hedge Against Injury.
I understand that it is possible to see the economic interest in almost everything (though things like randomization in sports it gets pretty hard). It seems to me lately there has been an increase in economist studying interesting areas that really are not about the economy. It seems like the knowledge and skill to examine complex data sets and draw conclusions is really defining what some economists are becoming (instead of the study of economic matters specifically). While the majority of economists still examine traditional economy related data some others are increasingly studying other areas. But this may just be my perception.
Some economics definitions:
- Princeton WordNet – “the branch of social science that deals with the production and distribution and consumption of goods and services and their management”
- Illinois State Water Survey – “The study of choice and decision-making in a world with limited resources”
- American Economic Association – “Economics is the study of how people choose to use resources.”
Related: Curious Cat Economics Dictionary – articles on economics – economics related blog posts
Another interesting experiment from Google: Using Prediction Markets to Track Information Flows: Evidence from Google
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Google’s prediction markets are reasonably efficient, but did exhibit four specific biases: an
overpricing of favorites, short aversion, optimism, and an underpricing of extreme outcomes.
Interesting paper. Prediction markets are an interesting attempt to use a market principles to gain insight into future prospects.
Related: Google Experiments Quickly and Often – Secrets of the World’s Best Companies
Response to: The desirability of rent controls
I do not believe rent controls are wise, in general. There are some options I wouldn’t mind – some sort of affordable housing that has breaks from the government (tax…) in exchange for a commitment to keep rental rates down. But wholesale rent controls are very unwise I believe.
A related issue I find amusing. You will hear don’t regulate at all state that it is regulation preventing housing being constructed (zoning regulations) that create rising prices which they imply is unfair. It seems to me the data shows the opposite of what those people claim. People are willing to pay more for the regulated housing markets. That means the market forces value the regulation and in order to increase the economic utility (which is represented by what people will pay) more regulation should be used not less.
Related: articles on real estate investing – regulatory risk (for rent control that would be the risk that investment property rights were limited due to rent control)