Generating Information in Real Markets
Pablo Díaz de Rábago
March 12, 2008
Watching long series of real estate prices can give us a hint to what markets can expect to see as long term points of equilibrium. Data from the US Federal Reserve show real median house price appreciation over the last 70 years to be very modest and in a line of +1%/+2% per annum.
Disintermediation of mortgage risk, (only 2 Trn. US $ over a total of 8 Trn. outstanding is in the hands of banks in the US economy) moral hazard in its rating and management and poor assumptions of the population and the lengthening of the availability of buildable land have led to the worst financial crisis of the last decades.
Apart from policy issues regarding the clean-up of the existing excesses (which I still cannot understand. If I do I will post another document in the blog) three things can be done in Europe to help avoid this situation in the next cycle, which apply to three issues mentioned before that are at the heart of the irrational and unsustainable price surge of the last decade.
1.- Create and promote price observatories in each of the markets. Apart from price, ratios to local personal income, rents and transactions will greatly help orient market prices.
2.- Promote rating of mortgage risk based on underlying value, and explicitly request disclosure of circumstances such as credit enhancement or liquidity for the assets.
3.- Promote mandatory maximum timelines for the transformation of raw land into buildable plots.
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