How Our Home Prices Compare To The Rest Of The World

Global Home Price Comparison
Lessons from the Forgotten Depression
Resisting the Intervention Urge
Chaining the Tiger
More Difficult Than Timing the Market

Quote of the week
"Institutional equity investors fear missing out on the rally. Bond investors fear deflation and the stock market is way overdone and is ripe for a steep correction. The gold bugs fear that the fiscal and monetary largesse globally will lead to inflation and fear that the U.S. dollar is on the verge of collapse. Never before has fear felt so reassuring - pick an asset class, and it's going up in price."
David Rosenberg in a recent newsletter to clients

Global Perspective - What's a Home Worth?

In an effort to address deflating stock prices, the Federal Reserve began lowering interest rates in January 2001. Within 18 months it had dropped to multi-decade lows. The strategy eventually worked, but it also fueled a housing boom, propelling home prices to unprecedented highs even after adjusting for inflation. But the strategy had a high price tag and since 2007 we have suffered the all-too-predictable bubble break and property depression.

But how have home prices fared around the globe? Did prices appreciate as significantly? Have other markets been as severely impacted as those in the U.S. over the past two years?

The answers surprised us. A series of charts recently published by The Economist magazine compared home prices from 1990 to present (Q2-09). In the next chart, we see nominal home price changes for Hong Kong, Britain, Spain, New Zealand, Canada and Japan, as well as two estimates for U.S. home prices - the generous Federal Housing Finance Authority (FHFA) and the more conservative Case-Shiller Home Price Index.

Notice the unique jump for Hong Kong in the late 1990s followed by the major correction and market re-ignition. Every other market in the chart, with the exception of Japan, experienced rapidly rising home prices starting in the early 2000s, with peaks in late 2007. Top of the list was Spain followed then by New Zealand (and Australia which closely tracked the path of its smaller neighbor), then Hong Kong, the U.S. followed by Canada and finally Japan, where home prices dropped over the two-decade period.

The takeaway is that although a lot of press was given to the situation in the U.S., there has been a relative dearth of articles comparing international housing markets on this side of the Atlantic and Pacific. In Spain, where home values jumped nearly 400%, prices are still 350% above where they were two decades ago, suggesting that this market has the greatest potential for further price declines. New Zealand and Australia aren't far behind on the "bubble-scale."

Notice that home prices in Canada significantly underperformed their global counterparts through the 1990s and into the new millennium, which may explain why the housing market there has remained more robust of late. And Japan, where prices are still little more than one-half of what they were two decades ago, continues to experience weak housing demand - a result of a combination of an aging population, punitive government stimulus and bankruptcy prevention policies that have frustrated any lasting recovery chances. These are lessons lost on U.S. policy makers. 

Figure 1 - International home price comparisons.  Source -

One thing is clear from this chart. Chances are that the worst is not over for the countries in which housing prices were launched into the stratosphere. It will take more time before economic gravity pulls them back to earth.  And even if U.S. property markets stabilize, what impact will falling prices in other parts of the world have on our economy?


Lessons from the Forgotten Depression

Past issues of the ProfitScore IQ have examined the wisdom of a policy to bailout struggling companies and industries in the face of an economic meltdown in historic terms. And in no period in history is the difference between present and past starker than it is today, compared to the 1920 depression.

Then the government and Federal Reserve stayed out of the way and let free market forces deal with the fallout and recovery. Will it become a blatant example of how failing to learn the lessons of history doom us to re-learn them the hard way?

Analysts and economists continually harken back to the period from 1929 to 1933, at the beginning of the Great Depression to laud the example set by Franklin Roosevelt and how he sought to cure the ills of the period with massive government spending and New Deal programs.

Opinions could not be more polarized. On one side supporters of John Maynard Keynes credit government intervention and deficit spending with saving our nation from economic ruin. On the other, opponents of corporate socialism argue that government intervention only served to prolong the economic pain and recovery which ultimately took the second great war to complete.

Why are other periods of economic contagion so rarely discussed? In a recent paper entitled Warren Harding and the Forgotten Depression of 1920, Thomas E. Woods Jr. of the Von Mises Institute explores the Great Depression of 1920 and examines the official response.

"The economic situation in 1920 was grim. By that year unemployment had jumped from 4 percent to nearly 12 percent, and GNP declined 17 percent. No wonder, then, that Secretary of Commerce Herbert Hoover-falsely characterized as a supporter of laissez-faire economics-urged President Harding to consider an array of interventions to turn the economy around. Hoover was ignored."

From 1920 to 1921, foreign trade was cut in half and prices in the U.S. fell by more than 20%.

Today, Hoover's advice would have been gladly accepted and instituted. But a different ethic prevailed in the Harding Administration in 1920.

"Instead of ‘fiscal stimulus,' Harding cut the government's budget nearly in half between 1920 and 1922. The rest of Harding's approach was equally laissez-faire. Tax rates were slashed for all income groups. The national debt was reduced by one-third. The Federal Reserve's activity, moreover, was hardly noticeable. As one economic historian puts it, "Despite the severity of the contraction, the Fed did not move to use its powers to turn the money supply around and fight the contraction."

Resisting the Intervention Urge

Today, policy makers would denounce such a policy as economic suicide and they'd have the backing of the majority of economists and voters. Tightening the purse strings and letting companies and consumers fend for themselves without the help of government cash would not be politically popular.

But then a strange thing happened.

"By the late summer of 1921, signs of recovery were already visible. The following year, unemployment was back down to 6.7 percent and was only 2.4 percent by 1923," according to Woods.

"In 1920-21," writes economist Benjamin Anderson, "we took our losses, we readjusted our financial structure, we endured our depression, and in August 1921 we started up again. . . . The rally in business production and employment that started in August 1921 was soundly based on a drastic cleaning up of credit weakness, a drastic reduction in the costs of production, and on the free play of private enterprise. It was not based on governmental policy designed to make business good."

As Thomas Woods explains, "The federal government [of 1920-21] did not do what Keynesian economists ever since have urged it to do: run unbalanced budgets and prime the pump through increased expenditures. Rather, there prevailed the old-fashioned view that government should keep spending and taxation low and reduce the public debt."

Even in 1920, Harding's laissez-faire approach attracted significant opposition from economists who believed intervention was the right approach, according to Woods. And few presidents before or since have been subjected to the degree of ridicule that President Warren Harding had to endure. His 1920 Republican Presidential Nomination Acceptance Speech provides some clues as to why.

"We will attempt intelligent and courageous deflation, and strike at government borrowing which enlarges the evil, and we will attack high cost of government with every energy and facility which attend Republican capacity. We promise that relief which will attend the halting of waste and extravagance, and the renewal of the practice of public economy, not alone because it will relieve tax burdens but because it will be an example to stimulate thrift and economy in private life.

Let us call to all the people for thrift and economy, for denial and sacrifice if need be, for a nationwide drive against extravagance and luxury, to a recommittal to simplicity of living, to that prudent and normal plan of life which is the health of the republic. There hasn't been a recovery from the waste and abnormalities of war since the story of mankind was first written, except through work and saving, through industry and denial, while needless spending and heedless extravagance have marked every decay in the history of nations." 

Figure 1 - Chart of the 46% drop in stock prices from 1919 through 1921 to the nearly 500% boom that followed over the subsequent eight years. Chart by

Can you imagine a political leader giving a similar speech today? But as much as this approach counters the prevailing conventional wisdom, the recovery that it elicited in the early 1920s was nothing short of phenomenal.

Chaining the Tiger

From 1922 through 1929, the U.S. gross national product rose 40%, from $74.1 billion to $103.1 billion and the federal government ran a surplus budget. Unemployment remained low, between 3 and 4%, and per capita income rose from $641 in 1921 to $847 in 1929.  As we see from Figure 1 above, after shedding 46% in value between 1919 and 1920, the Dow managed an incredible 500% gain over the next eight years that dwarfs any subsequent eight-year rally.

Such a recovery was possible only because the market had been allowed to work and the economy cleared of uncompetitive companies run by inept managers and debt levels had been significantly reduced. This created an environment that stimulated new business and economic growth, in addition to generating rapid job growth and fueling consumer confidence.

But there was one undeniable side-effect of this and every other sustainable recovery. While the average per capita income rose 35.3% from 1920 and 1929, it jumped 75% for the top 1% income earners. And it is this reality that present-day policy makers find so intolerable. Today's politicians would rather risk national economic health than allow the rich to benefit unfairly.  It is the same intervention ideology that would see the tiger fettered with chains to give the gazelle a better chance during the hunt.

Don't get me wrong, I'm all in favor of helping the poor. But how does keeping moribund companies on government mandated life-support and indenturing our children and children's children with debt to help the poor, especially if it increases their number longer-term? And even if these policies did work, how many would prefer to live in a world dominated by government committees that have the power to decide which businesses should survive and which should fail using your tax dollars to play Santa Claus?

Related Stories and Links:

House Prices Are Creeping Up, But It May Not Last

Safe as Houses - Interactive home price graph

Warren Harding and the Forgotten Depression of 1920 by Thomas E. Woods Jr.

Economy of the 1920s

Former Fannie Chief Credit Officer Says FHA Is $54 Billion Underwater

Measured in Euros, U.S. Per Capita GDP Is Down 25% Since 2000

How Currency Devaluation Can Be a Bad Thing

Foreclosures Mark Pace of Enduring U.S. Housing Crisis

Foreclosure Sales in Limbo Over Title Issue

More Difficult Than Timing the Market

My wife left for a well-deserved vacation to Puerto Rico last Tuesday, so I have been playing both Mom and Dad.  My kids are very involved in athletics and love to play basketball and soccer.  The month of October is just nuts because Sarah has three different teams that overlap during the month, so she is currently playing on 2 different basketball teams and one soccer team.  Annabelle is fortunately only playing on one soccer team at the moment. 

The day that my wife left for Puerto Rico, Annabelle began vomiting and running a high fever, so I had a kid at home most of last week.  Needless to say, I didn't get a lot done working from home, but have worked the entire weekend trying to catch up.  I have no idea how single parent families function.  Being a single parent in this day and age makes my job of making money in up and down markets seem like a walk in the park.  The next time I complain about how hard it is, please remind me to reread this letter. 

Working to grow your wealth,

John M. McClure
President & CEO
ProfitScore Capital Management, Inc.

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Posted 10-20-2009 11:39 AM by John M. McClure