It's Going on Everywhere!

I have just returned from a vacation in England and Scotland . It was a great holiday. I've spent quite a bit of time in Britain , but this was our first trip to the Lake District and the Highlands of Scotland . The scenery was spectacular and the people warm and welcoming.

The only negative was that with the dollar at such a poor value relative to the pound, it was expensive. Things like hotels, sandwiches, and dinners seem to cost about the same number of pounds as they would in dollars here. The result is that you are paying about 75% more for some items! Obviously, the exchange rate doesn't affect their citizens. I did note that their minimum wage is just over five pounds while ours, nationally, is just over five dollars. Hmmmm!

Being a real estate person it was particularly instructive to pass real estate offices and look at the pictures of homes listed for sale in those areas. What was astonishing is that homes there seem to be just as expensive as they are here, at least in the urban areas. A two-bedroom flat (think of it as a condo) in Edinburgh would likely be GBP350,000. That would cost you over $600,000 if you were to start out with dollars!

One of the pictures was of one of the ugliest homes I've ever seen. It was in the suburbs of Edinburgh and its cost was just under a million dollars. Even to a Scot, that's still expensive. Those in attractive areas like England's beautiful Lake District were as expensive, perhaps even more so, because it has attracted a number of wealthy retirees and those folks who want a second home in a desirable place. That's no different than here.

But when we got to the small towns without any such cachet, the prices were reasonable, just as they are in smaller towns here. That goes back to supply and demand and the plain fact that income opportunities are less in rural areas than they are in urban areas.

If you do some research at other areas around the world, wherever peoples' incomes are high, they want to buy property. They and other potential buyers are bidding up the prices of homes. In areas like London , Paris , and Hong Kong , prices are even higher than they are here. Remember the stories out of Tokyo in the early '90's where inky-dinky apartments were selling for $2,000,000?

I think that there are a couple of reasons for this. First, from 1980 to 2000 money was attracted to paper assets like stocks and bonds. With the dot com meltdown, I think that investment dollars want to flow somewhere else, and since 2000, it has flowed toward real property. It's hard to predict the future, but I believe that this trend may be sustained for the next ten years, perhaps even more.

Note that the rise in prices of homes has been exacerbated by the low interest rates we have experienced during this same period. As a friend said, "You are not buying property, you are buying a mortgage!" Here's what she meant. A few years ago the total interest over 30 years on a $100,000 loan at 8 percent would have been $164,155. A few years later, with rates at 5 percent, you can borrow $175,000 with the same total interest cost.

That fact alone has allowed buyers to buy more property for the same total expense. Note the other problem here: by making it more affordable to buy, it has basically caused the prices to rise! If interest rates had stayed at 7 or 8 percent, does anyone think that we would have experienced such a run up in home prices?

Let me know your thoughts.