tag:theconversation.com,2011:/us/topics/residential-real-estate-101580/articlesResidential real estate – The Conversation2022-12-19T16:42:43Ztag:theconversation.com,2011:article/1966852022-12-19T16:42:43Z2022-12-19T16:42:43ZIs the global housing market about to crash?<figure><img src="https://images.theconversation.com/files/501349/original/file-20221215-23-1uaap1.jpg?ixlib=rb-1.1.0&rect=62%2C0%2C6917%2C4732&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A UBS report placed Munich in the top four of its Global Real Estate Bubble Index locations for 2022. </span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/fr/image-photo/munich-alps-panorama-786988819">Shutterstock</a></span></figcaption></figure><p>Amid all the current geopolitical conflicts and economic events, investors are watching the real estate market with bated breath. If recent headlines around the world are anything to go by, they are right to do so. With prices down by 15% from their peak, <a href="https://www.bloomberg.com/news/articles/2022-12-12/sweden-s-free-falling-property-market-triggers-worst-slump-in-eu">Sweden’s housing market</a> is said to be in “free fall”. <a href="https://www.cnbc.com/2022/12/05/germanys-housing-market-is-ripe-for-a-serious-price-correction-economists-warn.html">Germany’s could nosedive by 25%</a> from peak to trough. Meanwhile, the foundations of the world’s most expensive market, in Hong Kong, are <a href="https://www.cnbc.com/2022/12/07/hong-kong-home-prices-plummet-to-five-year-lows-and-could-drop-further.html">starting to wobble</a>.</p>
<p>So, are we headed toward the next global housing market crash, or merely riding a cyclical fluctuation more typical of the real estate market?</p>
<h2>Reasons to worry</h2>
<p>Housing market crashes typically follow real estate bubbles. A real estate bubble is to be understood as a situation in which the average price of a house is much higher than its value based on price-building fundamentals. The 2007 housing crash was one prominent example of when a bubble – here, created by overly permissive mortgage policies adopted in the late 1990s – finally went <em>pop</em>. Economic recessions can also push the housing market over the edge.</p>
<p>As it stands, a number of indicators are in the red. Following the recession caused by the pandemic, consumers are now having to grapple with inflation and shrinking household budgets. In response, central banks around the world have hiked interest rates. In Germany, for example, rates for 10-year loans rose to 3.5% in September. They are now heading toward <a href="https://www.rohmert-medien.de/wp-content/uploads/2022/10/Der-Immobilienbrief-Nr-537.pdf">4% and possibly beyond</a>. In the United States, the <a href="https://www.statista.com/statistics/1302978/monthly-average-interest-rate-on-new-mortgage-loans-in-france/">average interest rate for a 30-year mortgage</a> exceeds 6.8%. The United Kingdom’s 10-year mortgage rate is currently fixed at around 4.21%, up from 2.4% in <a href="https://www.statista.com/statistics/386301/uk-average-mortgage-interest-rates/">September 2020</a>. At 4%, fixed interest rates for 10 years in the Netherlands are at their <a href="https://nltimes.nl/2022/10/03/mortgage-interest-rates-near-highest-point-eight-years">highest point since 2014</a>.</p>
<p>There are exceptions, however. Take France. Although the current European Central Bank (ECB) key interest rate is fixed at 2.5%, the national interest rate for a loan longer than one year is currently at 1.58%, due to a legal cap on real estate loans. This means that interest rates in the country are only rising with a time lag and do not depend solely on current market developments, such as in the United States or Germany, despite the latter also falling under the <a href="https://www.handelsblatt.com/finanzen/immobilien/bauzinsen-warum-immobilienfinanzierung-in-frankreich-noch-guenstig-ist/28760424.html">ECB’s monetary policy</a>.</p>
<h2>… and be reassured</h2>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/501665/original/file-20221217-21-rfmj1m.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/501665/original/file-20221217-21-rfmj1m.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=114&fit=crop&dpr=1 600w, https://images.theconversation.com/files/501665/original/file-20221217-21-rfmj1m.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=114&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/501665/original/file-20221217-21-rfmj1m.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=114&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/501665/original/file-20221217-21-rfmj1m.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=143&fit=crop&dpr=1 754w, https://images.theconversation.com/files/501665/original/file-20221217-21-rfmj1m.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=143&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/501665/original/file-20221217-21-rfmj1m.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=143&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">OECD/Provided by authors</span></span>
</figcaption>
</figure>
<p>That said, a global real estate crash remains highly unlikely. To put things into perspective, it is worth remembering that interest rates were higher in the early 2000s and have ebbed and flowed since (see table above). While this is unlikely to throw the housing market off balance, it can be argued it might turn investment away from single homes to <a href="https://www.bankrate.com/real-estate/what-is-a-multi-family-home/">multi-family properties</a>. Institutional investors also reinforce this trend by tending to favour multi-unit properties.</p>
<p>There are also a number of factors that are bound to stabilise the market. First, high interest rates for construction mortgages and rising land costs hold down the amount of construction. This in turn results in less living space in cities, maintaining demand. Second, the world market draws a certain resilience from its diversity, each market having different economic and geographical attributes. As there are many real estate markets spread across the world, many remain stable and offer fair value prices, such as <a href="https://www.ubs.com/global/en/wealth-management/insights/2022/global-real-estate-bubble-index/_jcr_content/mainpar/toplevelgrid_2045992449/col1/messagestage/messageteaser.0246173135.file/bGluay9wYXRoPS9jb250ZW50L2RhbS9hc3NldHMvd20vZ2xvYmFsL2luc2lnaHRzL2RvYy91YnMtZ2xvYmFsLXJlYWwtZXN0YXRlLWJ1YmJsZS1pbmRleC1lbi5wZGY=/ubs-global-real-estate-bubble-index-en.pdf">Warsaw, Poland</a>.</p>
<p>There is a lot of capital sloshing around, and real estate would generally gain proportionately in asset allocation. In the third quarter of 2022, cross-border real estate transactions around the world were estimated at over 62 billion US dollars. The Americas region alone was the leading source of international real estate investment, with <a href="https://www.us.jll.com/en/trends-and-insights/research/global/gmp#sectors">nearly 15.6 billion US dollars</a>.</p>
<p>This follows a general trend of increasing transactions across 2021 in many countries, economic consequences of the pandemic notwithstanding. In Germany alone, the office transaction volume totalled 28.2 billion euros, amounting to around <a href="https://www.catella.com/globalassets/global/mix-germany-corporate-finance/catella_european_office_market_2022.pdf">one third of European transactions</a>.</p>
<p>Overall, the likelihood of borrowers defaulting on their mortgages is generally low. This is due in part to the stringent lending practices implemented by financial institutions in the wake of the 2008 financial crisis, which have led to a decrease in the number of mortgages granted to individuals with questionable finances.</p>
<p>Much goes to show the global real estate market will adapt and recorrect itself over time, as has been the case up to now. It remains a solid and stable asset class, and fluctuations are part of its normal cycle.</p><img src="https://counter.theconversation.com/content/196685/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Les auteurs ne travaillent pas, ne conseillent pas, ne possèdent pas de parts, ne reçoivent pas de fonds d'une organisation qui pourrait tirer profit de cet article, et n'ont déclaré aucune autre affiliation que leur organisme de recherche.</span></em></p>House prices are dipping fast in many areas of the world. Is this a normal stage in the market fluctuation, or the sign of an imminent crash?Ari Birnbaum, Doctorant DBA, Université Côte d’AzurMohamad Hassan Shahrour, Maître de Conférences en Finance, Université Côte d'Azur, IAE Nice - Université Côte d'AzurLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1930052022-11-03T12:00:53Z2022-11-03T12:00:53ZA brief history of the mortgage, from its roots in ancient Rome to the English ‘dead pledge’ and its rebirth in America<figure><img src="https://images.theconversation.com/files/492228/original/file-20221028-27-xjagjx.jpg?ixlib=rb-1.1.0&rect=280%2C16%2C5155%2C3337&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Mortgages can haunt homeowners.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/illustration-of-a-mortgage-monster-looming-over-a-family-news-photo/584042598?phrase=mortgage%20homes&adppopup=true">GraphicaArtis/Getty Images</a></span></figcaption></figure><p>The average interest rate for a new U.S. <a href="https://www.cbsnews.com/news/home-loan-mortgage-interest-rate-7-percent-highest-since-2001/">30-year fixed-rate mortgage topped 7% in late October 2022</a> for the first time in more than two decades. It’s a sharp increase from one year earlier, when <a href="https://www.valuepenguin.com/mortgages/historical-mortgage-rates">lenders were charging homebuyers only 3.09%</a> for the same kind of loan. </p>
<p>Several factors, including <a href="https://www.nerdwallet.com/article/mortgages/fed-mortgage-rates">inflation rates and the general economic outlook</a>, influence mortgage rates. A primary driver of the ongoing upward spiral is the <a href="https://abc7chicago.com/fed-interest-rate-decision-today-hike-federal-reserve-meeting-november/12408055/">Federal Reserve’s series of interest rate hikes</a> intended to tame inflation. Its decision to increase the benchmark rate by <a href="https://www.federalreserve.gov/newsevents/pressreleases/monetary20221102a.htm">0.75 percentage points on Nov. 2, 2022</a>, to as much as 4% will propel the cost of mortgage borrowing even higher.</p>
<p>Even if you have had mortgage debt for years, you might be unfamiliar with the history of these loans – a subject I cover <a href="https://scholar.google.com/citations?user=KVv47noAAAAJ&hl=en&oi=ao">in my mortgage financing course</a> for undergraduate business students at Mississippi State University.</p>
<p>The term dates back to <a href="https://www.english-heritage.org.uk/learn/story-of-england/medieval/">medieval England</a>. But the roots of these legal contracts, in which land is pledged for a debt and will become the property of the lender if the loan is not repaid, go back thousands of years. </p>
<p><iframe id="1rD9w" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/1rD9w/2/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<h2>Ancient roots</h2>
<p>Historians trace the <a href="https://www.kingjamesbibleonline.org/Nehemiah-5-3/">origins of mortgage contracts</a> to the reign of King Artaxerxes of Persia, who ruled modern-day Iran in the fifth century B.C. The Roman Empire formalized and documented the legal process of pledging collateral for a loan. </p>
<p>Often using the <a href="https://www.biblegateway.com/passage/?search=John%202%3A13-16&version=NIV">forum and temples as their base of operations</a>, <em>mensarii</em>, which is derived from the word <em>mensa</em> or “bank” in Latin, would set up loans and charge <a href="https://www.biblegateway.com/passage/?search=John%202%3A13-16&version=NIV">borrowers interest</a>. These government-appointed public bankers required the borrower to put up collateral, whether real estate or personal property, and their agreement regarding the use of the collateral would be handled in one of three ways. </p>
<p>First, the <a href="https://www.merriam-webster.com/dictionary/fiducia"><em>Fiducia</em></a>, Latin for “trust” or “confidence,” required the transfer of both ownership and possession to lenders until the debt was repaid in full. Ironically, this arrangement involved no trust at all.</p>
<p>Second, the <a href="https://www.merriam-webster.com/dictionary/pignus"><em>Pignus</em></a>, Latin for “pawn,” allowed borrowers to retain ownership while <a href="https://scholarship.law.upenn.edu/cgi/viewcontent.cgi?referer=https://www.google.com/&httpsredir=1&article=1684&context=penn_law_review">sacrificing possession and use</a> until they repaid their debts. </p>
<p>Finally, the <a href="https://legaldictionary.lawin.org/hypotheca/"><em>Hypotheca</em></a>, Latin for “pledge,” let borrowers retain both ownership and possession while repaying debts. </p>
<h2>The living-versus-dead pledge</h2>
<p><a href="https://www.britannica.com/biography/Claudius-Roman-emperor">Emperor Claudius</a> brought Roman law and customs to Britain in A.D. 43. Over the next <a href="https://www.english-heritage.org.uk/learn/story-of-england/romans/">four centuries of Roman rule</a> and the <a href="https://www.english-heritage.org.uk/learn/story-of-england/early-medieval/">subsequent 600 years known as the Dark Ages</a>, the British adopted another Latin term for a pledge of security or collateral for loans: <a href="https://worldofdictionary.com/dict/latin-english/meaning/vadium"><em>Vadium</em></a>.</p>
<p>If given as collateral for a loan, real estate could be offered as “<a href="https://www.merriam-webster.com/dictionary/vadium%20vivum"><em>Vivum Vadium</em></a>.” The literal translation of this term is “living pledge.” Land would be temporarily pledged to the lender who used it to generate income to pay off the debt. Once the lender had collected enough income to cover the debt and some interest, the land would revert back to the borrower.</p>
<p>With the alternative, the “<a href="https://www.merriam-webster.com/dictionary/mortuum%20vadium"><em>Mortuum Vadium</em></a>” or “dead pledge,” land was pledged to the lender until the borrower could fully repay the debt. It was, essentially, an interest-only loan with full principal payment from the borrower required at a future date. When the lender demanded repayment, the borrower had to pay off the loan or lose the land. </p>
<p>Lenders would keep proceeds from the land, be it income from farming, selling timber or renting the property for housing. In effect, the land was <a href="https://www.jstor.org/stable/pdf/1321129.pdf">dead to the debtor</a> during the term of the loan because it provided no benefit to the borrower. </p>
<p>Following <a href="https://www.royal.uk/william-the-conqueror">William the Conqueror’s victory</a> at the Battle of Hastings in 1066, the English language was heavily influenced by <a href="https://blocs.mesvilaweb.cat/subirats/the-norman-conquest-the-influence-of-french-on-the-english-language-loans-and-calques/">Norman French</a> – William’s language.</p>
<p>That is how the Latin term “<em>Mortuum Vadium</em>” morphed into “<em>Mort Gage</em>,” Norman French for “dead” and “pledge.” “<a href="https://www.etymonline.com/word/mortgage">Mortgage</a>,” a <a href="https://ia600201.us.archive.org/1/items/cu31924021674399/cu31924021674399.pdf">mashup of the two words</a>, then entered the English vocabulary.</p>
<h2>Establishing rights of borrowers</h2>
<p>Unlike today’s mortgages, which are usually due within 15 or 30 years, English loans in the 11th-16th centuries were unpredictable. <a href="https://www.jstor.org/stable/pdf/1323192.pdf">Lenders could demand repayment</a> at any time. If borrowers couldn’t comply, lenders could seek a court order, and the land would be forfeited by the borrower to the lender. </p>
<p>Unhappy borrowers could <a href="https://www.law.cornell.edu/wex/chancery">petition the king</a> regarding their predicament. He could refer the case to the lord chancellor, who could <a href="https://www.britannica.com/topic/Chancery-Division">rule as he saw fit</a>. </p>
<p><a href="https://www.britannica.com/biography/Francis-Bacon-Viscount-Saint-Alban">Sir Francis Bacon</a>, England’s lord chancellor from 1618 to 1621, <a href="https://www.jstor.org/stable/752041">established</a> the <a href="https://www.law.cornell.edu/wex/equity_of_redemption">Equitable Right of Redemption</a>.</p>
<p>This new right allowed borrowers to pay off debts, even after default.</p>
<p>The official end of the period to redeem the property was called <a href="https://www.law.cornell.edu/wex/foreclosure">foreclosure</a>, which is derived from an Old French word that means “<a href="https://www.etymonline.com/word/foreclose">to shut out</a>.” Today, foreclosure is a legal process in which lenders to take possession of property used as collateral for a loan. </p>
<h2>Early US housing history</h2>
<p>The <a href="https://www.loc.gov/classroom-materials/united-states-history-primary-source-timeline/colonial-settlement-1600-1763/overview/">English colonization</a> of what’s now <a href="https://themayflowersociety.org/history/the-mayflower-compact/">the United States</a> didn’t immediately transplant mortgages across the pond. </p>
<p>But eventually, U.S. financial institutions were offering mortgages.</p>
<p><a href="https://www.huduser.gov/publications/pdf/us_evolution.pdf">Before 1930, they were small</a> – generally amounting to at most half of a home’s market value.</p>
<p>These loans were generally short-term, maturing in under 10 years, with payments due only twice a year. Borrowers either paid nothing toward the principal at all or made a few such payments before maturity.</p>
<p>Borrowers would have to refinance loans if they couldn’t pay them off.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/492809/original/file-20221101-25187-ypftn1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Aerial view of a single-family home community" src="https://images.theconversation.com/files/492809/original/file-20221101-25187-ypftn1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/492809/original/file-20221101-25187-ypftn1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=397&fit=crop&dpr=1 600w, https://images.theconversation.com/files/492809/original/file-20221101-25187-ypftn1.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=397&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/492809/original/file-20221101-25187-ypftn1.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=397&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/492809/original/file-20221101-25187-ypftn1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=499&fit=crop&dpr=1 754w, https://images.theconversation.com/files/492809/original/file-20221101-25187-ypftn1.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=499&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/492809/original/file-20221101-25187-ypftn1.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=499&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Mortgages make it easier for Americans to buy houses like these in Huntington Beach, Calif.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/aerial-view-of-single-family-homes-photographed-during-a-news-photo/1181102068?phrase=single-family%20house&adppopup=true">Jeff Gritchen/MediaNews Group/Orange County Register via Getty Images</a></span>
</figcaption>
</figure>
<h2>Rescuing the housing market</h2>
<p>Once America fell into the <a href="https://www.history.com/topics/great-depression">Great Depression</a>, the <a href="https://www.stlouisfed.org/news-releases/2008/05/02/does-the-great-depression-hold-the-answers-for-the-current-mortgage-distress">banking system collapsed</a>. </p>
<p>With most homeowners unable to pay off or refinance their mortgages, the <a href="https://www.federalreservehistory.org/essays/great-depression">housing market crumbled</a>. The number of <a href="https://www.encyclopedia.com/education/news-and-education-magazines/housing-1929-1941">foreclosures grew to over 1,000 per day by 1933</a>, and housing prices fell precipitously. </p>
<p>The <a href="https://www.fhfaoig.gov/Content/Files/History%20of%20the%20Government%20Sponsored%20Enterprises.pdf">federal government responded by establishing</a> new agencies to stabilize the housing market.</p>
<p>They included the <a href="https://www.hud.gov/program_offices/housing/fhahistory">Federal Housing Administration</a>. It provides <a href="https://www.consumerfinance.gov/ask-cfpb/what-is-mortgage-insurance-and-how-does-it-work-en-1953/">mortgage insurance</a> – borrowers pay a small fee to protect lenders in the case of default. </p>
<p>Another new agency, the <a href="https://sf.freddiemac.com/articles/insights/why-americas-homebuyers-communities-rely-on-the-30-year-fixed-rate-mortgage">Home Owners’ Loan Corp.</a>, established in 1933, bought defaulted short-term, semiannual, interest-only mortgages and transformed them into new long-term loans lasting 15 years.</p>
<p>Payments were monthly and self-amortizing – covering both principal and interest. They were also fixed-rate, remaining steady for the life of the mortgage. Initially they skewed more heavily toward interest and later defrayed more principal. The corporation made new loans for three years, tending to them until it <a href="https://content.time.com/time/subscriber/article/0,33009,858135,00.html">closed in 1951</a>. It pioneered long-term mortgages in the U.S.</p>
<p>In 1938 Congress established the Federal National Mortgage Association, better known as <a href="https://www.fanniemae.com/about-us/who-we-are/history">Fannie Mae</a>. This <a href="https://www.financial-dictionary.info/terms/government-sponsored-enterprise/">government-sponsored enterprise</a> made fixed-rate long-term mortgage loans viable <a href="https://www.investopedia.com/terms/s/securitization.asp">through a process called securitization</a> – selling debt to investors and using the proceeds to purchase these long-term mortgage loans from banks. This process reduced risks for banks and encouraged long-term mortgage lending.</p>
<h2>Fixed- versus adjustable-rate mortgages</h2>
<p>After World War II, Congress authorized the Federal Housing Administration to insure <a href="https://www.govinfo.gov/content/pkg/CPRT-108HPRT92629/html/CPRT-108HPRT92629.htm">30-year loans on new construction</a> and, a few years later, purchases of existing homes. But then, the <a href="https://files.stlouisfed.org/files/htdocs/publications/review/69/09/Historical_Sep1969.pdf">credit crunch of 1966</a> and the years of high inflation that followed made adjustable-rate mortgages more popular.</p>
<p>Known as ARMs, these mortgages have stable rates for only a few years. Typically, the initial rate is significantly lower than it would be for 15- or 30-year fixed-rate mortgages. Once that initial period ends, <a href="https://www.investopedia.com/terms/a/arm.asp">interest rates on ARMs</a> get adjusted up or down annually – along with monthly payments to lenders. </p>
<p>Unlike the rest of the world, where ARMs prevail, Americans still prefer the <a href="https://sf.freddiemac.com/articles/insights/why-americas-homebuyers-communities-rely-on-the-30-year-fixed-rate-mortgage">30-year fixed-rate mortgage</a>.</p>
<p>About <a href="https://data.census.gov/cedsci/table?q=DP04&t=Housing">61% of American homeowners</a> have mortgages today – with <a href="https://doi.org/10.1080/15214842.2020.1757357">fixed rates the dominant type</a>.</p>
<p>But as interest rates rise, demand for <a href="https://www.corelogic.com/intelligence/interest-rates-are-up-but-arm-backed-home-purchases-are-way-up/">ARMs is growing</a> again. If the Federal Reserve fails to slow inflation and interest rates continue to climb, unfortunately for some ARM borrowers, the term “dead pledge” may live up to its name.</p><img src="https://counter.theconversation.com/content/193005/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michael J. Highfield does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>With 30-year fixed rates hitting a 20-year high of 7%, a finance scholar explains where these life-altering loans originated.Michael J. Highfield, Professor of Finance and Warren Chair of Real Estate Finance, Mississippi State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1867982022-07-28T12:27:51Z2022-07-28T12:27:51ZFlood risk ratings: Translating risk to future costs helps homebuyers and renters grasp the odds<figure><img src="https://images.theconversation.com/files/475927/original/file-20220725-10345-ggrsw6.jpg?ixlib=rb-1.1.0&rect=0%2C33%2C5647%2C3719&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Repairing storm damage is expensive, and insurance covers less than many people realize.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/kim-decota-climbs-through-her-in-laws-storm-damaged-home-on-news-photo/1234999420">Sean Rayford/Getty Images</a></span></figcaption></figure><p>If you look at homes on real estate websites today, you’ll likely see risk ratings for flooding, hurricanes and even wildfires. </p>
<p>In theory, summarizing risk information like this should help homebuyers and renters make more informed housing choices. But <a href="https://theconversation.com/coastal-home-buyers-are-ignoring-rising-flood-risks-despite-clear-warnings-and-rising-insurance-premiums-179603">surveys show</a> it isn’t working that way, at least not yet. Housing developments and home sales are <a href="https://theconversation.com/new-flood-maps-show-us-damage-rising-26-in-next-30-years-due-to-climate-change-alone-and-the-inequity-is-stark-175958">still expanding in flood-</a> and <a href="https://theconversation.com/a-case-for-retreat-in-the-age-of-fire-184031">wildfire-prone areas</a>.</p>
<p>The problem isn’t necessarily that consumers are ignoring the numbers. In our view, as experts in hazards geography, it’s that the way risk information is being presented ignores long-established lessons from behavioral science.</p>
<p>These ratings tend to appear as a single number for each hazard and lack an <a href="https://elke-u-weber.com/media/2017_bsp_yoeli.pdf">intuitive interpretation</a>. What does it mean to have a heat risk of 84 (“extreme”) with 52 hot days in 2050, or a flood risk of 10 (“extreme”)?</p>
<p>We believe that current and future hazard and climate risks can more effectively be translated as costs, savings and trade-offs. </p>
<h2>Making risk personal</h2>
<p>Studies show that people rely on <a href="https://doi.org/10.1007/s13753-021-00350-w">personal experience as the dominant driver</a> when considering risk. In the absence of having personally experienced a flood or wildfire damage, they <a href="https://doi.org/10.1177/0013916517709561">need actionable and understandable information</a>.</p>
<p>We belong to a group of more than 20 interdisciplinary researchers at universities in Arizona, Florida, Louisiana and South Carolina who are trying to improve risk rating information. We’re currently testing an online <a href="https://www.hazardaware.org/">tool for the Gulf Coast</a> that provides residents with actionable resilience information. It is an early model of what residential risk reporting could look like.</p>
<p>Rather than just presenting a score, the tool offers information on the costs annually and over time that one can expect from each hazard, such as flooding or wind damage, and how the home’s census block compares with the local area, county and state. To capture the effects of sea-level rise, for example, we model the number of years it will take for a home to go from outside a high flood risk area to being inside.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/475478/original/file-20220721-14414-lhtf0a.PNG?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Screengrab from HazardAware shows a specific home in Terrebonne Parish, Louisiana, facing costs of around $5,750 over five years and $34,500 over the life of a 30-year mortgage." src="https://images.theconversation.com/files/475478/original/file-20220721-14414-lhtf0a.PNG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/475478/original/file-20220721-14414-lhtf0a.PNG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=263&fit=crop&dpr=1 600w, https://images.theconversation.com/files/475478/original/file-20220721-14414-lhtf0a.PNG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=263&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/475478/original/file-20220721-14414-lhtf0a.PNG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=263&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/475478/original/file-20220721-14414-lhtf0a.PNG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=330&fit=crop&dpr=1 754w, https://images.theconversation.com/files/475478/original/file-20220721-14414-lhtf0a.PNG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=330&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/475478/original/file-20220721-14414-lhtf0a.PNG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=330&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">A hazard cost summary for a home in Louisiana shows what risk looks like in dollars.</span>
<span class="attribution"><a class="source" href="https://www.hazardaware.org/HazardMitigation.aspx">HazardAware</a>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
</figcaption>
</figure>
<h2>Homebuyers’ psychological hurdles</h2>
<p>The development of real estate-focused climate and hazard risk metrics, such as those offered by <a href="https://firststreet.org/risk-factor/flood-factor/">First Street Foundation</a> and <a href="https://climatecheck.com/">ClimateCheck</a>, is a step in the right direction, going beyond government risk maps that provide <a href="https://www.ncei.noaa.gov/access/billions/mapping">risk data by county</a>. The next step is to ground those numbers in behavioral science research.</p>
<p>People do not ignore risk ratings per se, but the point at which information <a href="https://doi.org/10.1111/j.1539-6924.2011.01647.x">motivates people to take protective actions</a> varies.</p>
<p>The motivation hurdle is lower for <a href="https://doi.org/10.1007/s13753-021-00350-w">people with past experience</a>, those who are aware of the risks and receptive to this kind of information, and those who have the financial resources to choose safer communities.</p>
<p>For others, the hurdle can be much higher. They might struggle with <a href="https://wsp.wharton.upenn.edu/book/ostrich-paradox/">common decision biases</a>, such as oversimplifying the severity of the risk, which leads to either an overestimation or underestimation of the threat depending on the type of hazard, focusing on today rather than the future, or simply assuming nothing bad is going to happen. They might just follow what others do – which research finds is what <a href="https://doi.org/10.1007/s13753-021-00350-w">most of us do when deciding on a home</a>.</p>
<p>Many people also have unrealistic beliefs that <a href="https://oxfordre.com/naturalhazardscience/view/10.1093/acrefore/9780199389407.001.0001/acrefore-9780199389407-e-195">insurance and government payouts after disasters</a> will fully compensate them for their losses, and a <a href="https://doi.org/10.1061/%28ASCE%29NH.1527-6996.0000268">false sense of security</a> that building codes and permitting mean homes are built to withstand any natural hazard. </p>
<p>The combination of these decision biases causes residents to underestimate the risk and impacts from disasters and climate change. Most people then underprepare and don’t <a href="https://doi.org/10.1088/1748-9326/aabb32">consider these risks in their housing choices</a>.</p>
<p>Risk ratings could help overcome those biases by expressing risk information in relatable terms such as the number of assistance requests made to the Federal Emergency Management Agency after disasters, the rejection rate and the average FEMA funds received per applicant in the area.</p>
<p><iframe id="j73PX" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/j73PX/9/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<h2>Next step: Pull it all together in one location</h2>
<p>Ideally, homebuyers and renters would have a one-stop shop for all of this risk information about a property. To be prepared for climate change, risk must become a factor in housing choices similar to square footage and number of bedrooms.</p>
<p>Currently, risk data is scattered. For example, people can learn about insurance costs by checking <a href="https://msc.fema.gov/portal/home">flood insurance rate maps</a>, which outline the areas with a 1% or greater annual chance of flooding. Or they can ask an insurance agent to generate a Comprehensive Loss Underwriting Exchange report, which lists all flood insurance claims made on a property in the past five to seven years. A handful of states such as California require sellers to disclose the risk of natural hazards to the property.</p>
<p>In our view, the continuing influx of residents into high-risk areas, along with skyrocketing disaster losses, presents an urgent need to give prospective renters and buyers better information about the risks properties face.</p><img src="https://counter.theconversation.com/content/186798/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Melanie Gall receives funding from the National Academies' Gulf Research Program, USAID, U.S. Housing and Urban Development, and Feeding America. She is affiliated with the National Hazard Mitigation Association (NHMA), the Association of American Geographers (AAG), the North American Alliance of Hazards and Disaster Research Insitutes (NAAHDRI), and the Arizona Voluntary Organizations Active in Disasters. </span></em></p><p class="fine-print"><em><span>Christopher Emrich works for the University of Central Florida, the creator of <a href="http://www.vulnerabilitymap.org">www.vulnerabilitymap.org</a>. He received funding from the National Academies of Science, Engineering, and Medicine's Gulf Research Program to build <a href="http://www.hazardaware.org">www.hazardaware.org</a></span></em></p><p class="fine-print"><em><span>Marie Aquilino receives funding from the National Academies' Gulf Research Program, USAID, and the U.S. Department of Housing and Urban Development. </span></em></p>Telling people they have a flood risk rating of 10 is less powerful than explaining how much they’re likely to pay to deal with flooding over the next five years.Melanie Gall, Clinical Professor and Co-Director, Center for Emergency Management and Homeland Security, Watts College, Arizona State UniversityChristopher Emrich, Associate Professor of Public Administration, University of Central FloridaMarie Aquilino, Senior Research Analyst in Emergency Management, Arizona State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1627452021-06-29T17:49:57Z2021-06-29T17:49:57ZCanada’s housing crisis needs answers — but first we need to ask the right questions<figure><img src="https://images.theconversation.com/files/407736/original/file-20210622-14-lqajvu.JPG?ixlib=rb-1.1.0&rect=33%2C0%2C7315%2C4902&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A new home is built in a housing development in Ottawa in July 2020.</span> <span class="attribution"><span class="source">THE CANADIAN PRESS/Sean Kilpatrick </span></span></figcaption></figure><p>The struggle to match housing costs to incomes affects everyone in Canada. It impacts not only people who struggle to afford a place to live, but health care, education, the economy and quality of life in general. </p>
<p>Housing is a critical piece of our social infrastructure. It is literally the platform on which most other aspects of social life depend.</p>
<p>For growing numbers who either don’t have a home at all, or who must spend large proportions of their incomes on shelter — the normal affordability benchmark says <a href="https://www.cnbc.com/2018/06/06/how-much-of-your-income-you-should-be-spending-on-housing.html">shelter costs (rent/mortgage plus taxes plus utilities) should not exceed 30 per cent</a> — the hardships are real.</p>
<p>Though it’s clear <a href="https://financialpost.com/real-estate/more-canadians-than-ever-before-are-expecting-higher-home-prices">housing prices are climbing</a> and <a href="https://rabble.ca/news/2021/05/corporate-landlords-favoured-government-are-making-housing-unaffordable">rent is becoming more unaffordable</a>, there is little information available to quantify the problems caused by affordability issues.</p>
<p>The <a href="https://www.placetocallhome.ca/">National Housing Strategy</a> is a 10-year plan designed to tackle some of these issues, but to execute the strategy, Canada needs to build its research capacity. </p>
<p>We need more research that’s better suited to current challenges, and more research capacity to understand the challenges, inform housing providers and policy-makers to provide solutions and evaluate those solutions. </p>
<h2>Affordability trade-offs</h2>
<p>For those of modest income, affordability problems can include simply finding a decent place to live and <a href="https://cityobservatory.org/residual-income-a-better-way-of-measuring-affordability/">having to give up other necessities</a> such as food, clothing and transportation to keep it. </p>
<p>Such trade-offs create other hardships, such as <a href="https://doi.org/10.1136/jech-2019-212286">poor physical and mental health</a> and <a href="https://carleton.ca/cure/wp-content/uploads/Non_Housing_Outcomes_of_Affordable_Housing.pdf">lower school performance</a>, which can ultimately manifest as <a href="https://doi.org/10.2105/AJPH.2020.305661">lower life expectancy</a> and <a href="https://doi.org/10.1093/oxfordjournals.esr.a018266">multi-generational poverty</a>.</p>
<p>About <a href="https://www.canadianmortgagetrends.com/2019/03/homeownership-rates-in-canada-still-among-highest-globally/">68 per cent of Canadians own their homes</a>, but whether that is sustainable is an open question as prices outstrip incomes. </p>
<p>If Canadians can’t buy homes, they will need to rent, but our rental sector can’t accommodate everyone who is being priced out. We need to retain existing affordable housing in the market and to build more rental housing that is affordable to those in the greatest need. </p>
<p>Even people who are earning a good income are increasingly facing tough choices with serious consequences. When high housing costs keep Canadians from buying a couch or medications or taking a vacation, it <a href="https://doi.org/10.1080/12265934.2019.1687320">affects the economy and individual well-being</a>.</p>
<h2>From renovictions to neglect</h2>
<p>The news is filled with stories of “renoviction”: landlords using unsavoury tactics to get lower-paying tenants to leave, such as <a href="https://doi.org/10.1016/j.geoforum.2019.09.011">neglecting maintenance, harassment</a> or offering <a href="https://www.thespec.com/news/hamilton-region/2021/04/28/renoviction-looms-for-east-hamilton-tenants.html">cash bonuses in the thousands of dollars</a>, which can be attractive to people of limited income, but leave them with nowhere to go.</p>
<p>Our aging population lacks sufficient alternatives when health and mobility issues make it impossible for them to live independently at home. They can end up in <a href="http://www.policyalternatives.ca/sites/default/files/uploads/publications/BC_Office_Pubs/home_insecurity.pdf">the overburdened long-term care system</a> when other forms of housing and support would be preferable and cheaper. In many cases, people use long-term care not because it’s the best housing option, but because it’s the only housing option. </p>
<p>Housing challenges are not experienced equally. To be successful, housing solutions need redress the inequities faced by people living on low incomes, <a href="https://www.homelesshub.ca/blog/living-colour-racialized-housing-discrimination-canada">people from racialized groups</a>, <a href="https://centre.support/housing-crisis-has-long-plagued-canadas-indigenous-communities/">Indigenous people</a>, <a href="https://theconversation.com/lgbtq-canadian-baby-boomers-in-need-of-safer-housing-in-senior-years-151827">LGBTQ+</a>, <a href="https://inclusioncanada.ca/wp-content/uploads/2018/05/Canada-Right-to-Housing-for-Persons-with-Disabilities-May-15-2017.pdf">people with disabilities</a> and others. </p>
<p>These issues are challenging, but not hopeless. They can be resolved with levers such as <a href="https://www.theglobeandmail.com/canada/british-columbia/article-federal-rent-subsidy-program-to-roll-out-to-25000-bc-households/">rental assistance</a> and <a href="https://www.canada.ca/en/financial-consumer-agency/services/mortgages/preparing-mortgage.html">mortgage rules</a>, by <a href="https://www.broadbentinstitute.ca/margotyoung/policy_brief_national_housing_strategy">creating more social housing</a> and setting priorities <a href="https://www.placetocallhome.ca/consulting-with-canadians">around the needs of citizens</a>.</p>
<h2>A low research capacity</h2>
<p>Canada’s housing research capacity is low compared to other countries and relative to the urgency of the problem. <a href="https://www.ahuri.edu.au/">Australia</a>, <a href="https://housingevidence.ac.uk/">the United Kingdom</a> and many European countries allocate far more for housing research. </p>
<p>The first step is understanding the picture in all its complexity, so governments can have the tools to make the best choices. A new federal initiative is designed to bridge the gap. </p>
<p>The Canada Mortgage and Housing Corporation is investing nearly $14 million in housing research under the National Housing Strategy’s <a href="https://www.cmhc-schl.gc.ca/en/professionals/housing-markets-data-and-research/housing-research/collaborative-housing-research-network">Collaborative Housing Research Network</a>.</p>
<p>The initiative includes six major research groups across the country, including <a href="http://chec-ccrl.ca/">the Canadian Housing Evidence Collaborative</a>. Each will address a different aspect of the problem, from housing in the north, to housing for older people, to boosting the community housing sector, to addressing housing supply, to <a href="https://www.cmhc-schl.gc.ca/en/professionals/housing-markets-data-and-research/housing-research/collaborative-housing-research-network">innovative practices in affordable housing</a>.</p>
<p>This will generate much-needed research to address such critical questions as: What is happening to the supply of naturally occurring affordable housing? Where can newcomers to Canada afford to live? Who is most affected by evictions, and is our knowledge affected by under-reporting? Can governments avoid costs by spending more on housing and living supports and less on problems caused by homelessness? </p>
<p>Policymakers need current, contextual and relevant evidence to understand Canada’s housing challenges, and to design the most effective solutions.</p><img src="https://counter.theconversation.com/content/162745/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jim Dunn receives funding from the Social Sciences and Humanities Research Council, the Canadian Institutes of Health Research and the Canada Mortgage and Housing Corporation. He is affiliated with the Halton Down Syndrome Association as a volunteer housing champion. </span></em></p>We need more research and research capacity that’s better suited to current housing challenges. We must inform housing providers and policy-makers to provide solutions and evaluate those solutions.Jim Dunn, Professor, Department Chair of the Department of Health, Aging & Society, McMaster UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1558542021-03-24T17:43:33Z2021-03-24T17:43:33ZAs inflation looms, here’s how real estate and farmland have protected investors<figure><img src="https://images.theconversation.com/files/389643/original/file-20210315-17-3xr742.JPG?ixlib=rb-1.1.0&rect=65%2C0%2C3567%2C2770&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A real estate sold sign is shown in Oakville, Ont., in December 2020. Real estate and farmland are traditional hedges against inflation.</span> <span class="attribution"><span class="source">THE CANADIAN PRESS/Richard Buchan</span></span></figcaption></figure><p>More than 100 years ago, <a href="https://www.masterclass.com/articles/what-is-inflation-in-economics#what-is-inflation">a jug of milk was 40 cents</a>. Today, it’s almost $4. This phenomenon is called inflation. </p>
<p>Over the past five decades, all industrialized nations have experienced inflation. <a href="https://www.investopedia.com/ask/answers/111414/how-can-inflation-be-good-economy.asp">A typical rate of inflation is around two per cent and indicates a stable economy</a>.</p>
<p>Although Murray Rothbard, a 20th-century economic historian and political theorist, argues that <a href="https://www.azquotes.com/author/12685-Murray_Rothbard/tag/inflation">the natural tendency of the state is inflation</a>, it has its drawbacks. For example, if prices increase too fast, you lose purchasing power. To this end, Milton Friedman, a Nobel Prize-winning economist, observed that <a href="https://www.wsj.com/articles/SB10001424052748704402404574525980041136234">inflation is taxation without legislation</a>.</p>
<h2>Inflation in Canada</h2>
<p>Although inflation in Canada has been historically stable, it can never be fully anticipated. The COVID-19 pandemic has created unprecedented market uncertainty and economic anomalies. </p>
<p>According to the latest <a href="https://www150.statcan.gc.ca/n1/pub/71-607-x/2018016/cpi-ipc-eng.htm">Statistics Canada data</a>, the year-over-year inflation rate was 0.7 per cent. Some experts are suggesting that <a href="https://financialpost.com/news/economy/low-inflation-skeptics-are-right-just-not-as-right-as-they-think-they-are">inflation is currently underestimated</a>. Demand for essential goods and services is high, as their prices are tracking above average. Yet the current “basket of goods” in Canada’s consumer price index — used to assess inflation — includes many non-essential categories that did not appreciate in the last year.</p>
<p>Therefore, current measures may need to be reconsidered to accurately reflect Canada’s inflation.</p>
<p>The much-anticipated end to COVID-19 and Canada’s stimulus package further point to long-term inflation. As economies emerge from recessions and gross domestic product (GDP) rises, inflation occurs. </p>
<p>Historically, Canada’s inflation has followed, but lagged, its GDP increases. Accordingly, post-pandemic GDP gains are likely to be a driver of inflation. The unparalleled COVID-19 stimulus package, <a href="https://www.mckinsey.com/featured-insights/coronavirus-leading-through-the-crisis/charting-the-path-to-the-next-normal/total-stimulus-for-the-covid-19-crisis-already-triple-that-for-the-entire-2008-09-recession#">420 per cent larger than Canada’s 2008 recession stimulus package</a>, is also likely to create inflationary trends.</p>
<figure class="align-center ">
<img alt="A graph shows inflation and GDP movement." src="https://images.theconversation.com/files/387072/original/file-20210301-23-z42asp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/387072/original/file-20210301-23-z42asp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=270&fit=crop&dpr=1 600w, https://images.theconversation.com/files/387072/original/file-20210301-23-z42asp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=270&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/387072/original/file-20210301-23-z42asp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=270&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/387072/original/file-20210301-23-z42asp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=339&fit=crop&dpr=1 754w, https://images.theconversation.com/files/387072/original/file-20210301-23-z42asp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=339&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/387072/original/file-20210301-23-z42asp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=339&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Inflation and GDP.</span>
<span class="attribution"><span class="source">(Macrotrends, Statista, Author's calculations)</span>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<h2>Hedge against inflation</h2>
<p>To individuals, losing purchasing power as a result of inflation is perhaps the most salient feature of increasing prices. Anticipating those increases, prudent investors explore ways to hedge against inflation. </p>
<p>An inflation hedge involves investing in an asset that is expected to maintain or appreciate in an inflationary period. Hopefully, its appreciation exceeds, or is at least comparable to, inflation. Real estate has long been considered a hedge against inflation, as rent and property values tend to increase with inflation. Historical empirical evidence supports real estate and farmland as effective inflation hedges. </p>
<figure class="align-center ">
<img alt="A farmer harvests hay" src="https://images.theconversation.com/files/389646/original/file-20210315-15-1xpb7ax.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/389646/original/file-20210315-15-1xpb7ax.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=337&fit=crop&dpr=1 600w, https://images.theconversation.com/files/389646/original/file-20210315-15-1xpb7ax.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=337&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/389646/original/file-20210315-15-1xpb7ax.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=337&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/389646/original/file-20210315-15-1xpb7ax.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=423&fit=crop&dpr=1 754w, https://images.theconversation.com/files/389646/original/file-20210315-15-1xpb7ax.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=423&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/389646/original/file-20210315-15-1xpb7ax.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=423&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">A farmer harvests hay on a farm near Cremona, Alta., in August 2020.</span>
<span class="attribution"><span class="source">THE CANADIAN PRESS/Jeff McIntosh</span></span>
</figcaption>
</figure>
<p>In order to explore the historical effectiveness of Canada’s real estate and farmland as an investment hedge, I compared inflation to the new housing price index and farmland values from 2000 to 2020.</p>
<p>I selected the new housing price index as a proxy for property appreciation because it’s the most timely indicator of changes to residential real estate values. Farmland values obtained from <a href="https://www.fcc-fac.ca/fcc/about-fcc/reports/2018-farmland-values-historic-report-e.pdf">Farm Credit Canada</a> were used to determine its appreciation. </p>
<p>From 2000 to 2020, the cumulative inflation change was 39 per cent compared to a change and increase of 51.8 per cent to the new housing price index. The data showed that the new price housing index tracked above inflation. </p>
<figure class="align-center ">
<img alt="A graph shows inflation and housing index." src="https://images.theconversation.com/files/387073/original/file-20210301-21-1q8aolw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/387073/original/file-20210301-21-1q8aolw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=300&fit=crop&dpr=1 600w, https://images.theconversation.com/files/387073/original/file-20210301-21-1q8aolw.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=300&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/387073/original/file-20210301-21-1q8aolw.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=300&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/387073/original/file-20210301-21-1q8aolw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=377&fit=crop&dpr=1 754w, https://images.theconversation.com/files/387073/original/file-20210301-21-1q8aolw.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=377&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/387073/original/file-20210301-21-1q8aolw.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=377&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Cumulative change in inflation and the new housing price index.</span>
<span class="attribution"><span class="source">(Statista, Statistics Canada)</span>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>From 2000 to 2020, the cumulative farmland value appreciation was 168.4 per cent. The data showed that Canadian farmland significantly outpaced inflation.</p>
<figure class="align-center ">
<img alt="A graph shows inflation and farmland value" src="https://images.theconversation.com/files/387077/original/file-20210301-13-hu31od.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/387077/original/file-20210301-13-hu31od.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=317&fit=crop&dpr=1 600w, https://images.theconversation.com/files/387077/original/file-20210301-13-hu31od.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=317&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/387077/original/file-20210301-13-hu31od.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=317&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/387077/original/file-20210301-13-hu31od.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=398&fit=crop&dpr=1 754w, https://images.theconversation.com/files/387077/original/file-20210301-13-hu31od.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=398&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/387077/original/file-20210301-13-hu31od.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=398&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Cumulative change in inflation and farmland value.</span>
<span class="attribution"><span class="source">(Statista, Farm Credits Canada, author's calculations)</span>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>Based on this 20-year period, it’s evident that residential real estate and farmland values appreciated faster than inflation, suggesting both were effective hedges against inflation.</p>
<h2>Looking to the past to predict the future</h2>
<p>Accordingly, anticipating a period of inflation, <a href="https://www.theglobeandmail.com/business/article-sophisticated-investors-are-desperate-to-buy-canadas-apartment/">savvy investors are significantly expanding their real estate portfolios</a>. Although rising prices, let alone investments, can never be fully anticipated, the best known predictor of the future is the past. </p>
<p>Macroeconomics trends, including the COVID-19 stimulus package, expected GDP gains and anticipated reduction in unemployment, suggest inflation is on the horizon in Canada.</p>
<p>In these extraordinarily uncertain times, prudent investors seek to protect the value of their money. Previously, Canadian residential real estate and farmland have proved to be strategic inflation hedges. </p>
<p>After all, as billionaire industrialist Andrew Carnegie <a href="https://www.realtymogul.com/knowledge-center/article/20-famous-real-estate-investing-quotes">once stated</a>:</p>
<blockquote>
<p>“Ninety per cent of all millionaires become so through owning real estate. More money has been made in real estate than in all industrial investments combined.”</p>
</blockquote><img src="https://counter.theconversation.com/content/155854/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Grant Alexander Wilson has previously consulted for, and has received research funds, from Avenue Living Asset Management.</span></em></p>Canadian residential real estate and farmland have historically proven to be strategic hedges against inflation.Grant Alexander Wilson, Faculty Member, Department of Management & Marketing, Edwards School of Business, University of SaskatchewanLicensed as Creative Commons – attribution, no derivatives.