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Strategies & Market Trends : Booms, Busts, and Recoveries -- Ignore unavailable to you. Want to Upgrade?

To: Moominoid who wrote (62737)	4/25/2005 12:23:07 PM
From: Elroy Jetson	Read Replies (2) \| Respond to of 74559

Agricultural buffers required in Germany around small towns can give you a mistaken illusion of ruralness when in fact you are only four high speed train stops and 30 minutes from the center of a large city. As a consequence the price of homes in the small town reflect the fact that they are so close to the city center, even though it looks like you are out in the country. The home which is 30 minutes away from the urban center here in America is still in the city, yet comparably priced. The agricultural belt with good transportation makes for better living quality without an increase in price. Less expensive homes in Germany compared to the Netherlands is a good example of the impact of income density. Although incomes and wealth are comparable, the Netherlands has roughly 363 people per square kilometer compared with 228 in Germany. Unification in the European Union made living in Germany easy for Dutch citizens so many moved just across the border. The same thing is going on in the east of Germany where Poland has 121 people per square kilometer and lower incomes. This greatly reduced income density makes homes in Poland dramatically less expensive than Germany. As a consequence the partial EU affiliation has led many Germans to move to nearby Polish towns where they can get twice the home for the same price. If you want to understand real estate values always look to income density. Even the current real estate bubble "makes sense". Very loose lending standards promulgated by the Federal Reserve have magnified income density into what we might call effective income density. My housekeeper and her husband with an estimated combined annual gross income of $30k own two homes in Los Angeles. My gardener and wife with a similar income own seven rental homes in addition to their own. In normal times neither would have qualified for the loans to buy these properties. But their reduced-pay interest-only loans require them to pay only 25% of the interest rate being charged. So while their loans grow in size every day, for the time being their income is sufficient to own these homes. But because the rents on these "investments" are insufficient to pay for the property taxes, maintenance, and the actual interest rate being charged, they will need to either sell these investments or lose them to foreclosure. Even with the reduced-pay loans so much of my gardener's income is spent subsidizing the tenants that they are under extreme and increasing financial pressure. Normally people do not choose to live like this just as people don;t normally choose to buy internet stocks at a price to earnings ratio of 650 - but in a financial bubble they do. The grossly insufficient rents on the "investment homes" is your key indicator that income density is insufficient to support the current home price. The explosion of available debt notwithstanding. Now that you mentioned it, Canberra is quite similar to Irvine California. A city where no one appears to live. .