Levered assets, such as real estate, tend to have prices that are correlated with interest rates. Lower rates usually translate into higher asset prices. We are living through this kind of environment right now. And so it is generally valuable to have a view on where rates might go next.
To do that, it can be helpful to look back at history. And a lot of the time, that look goes as far back as the second half of the 20th century. I wasn't buying real estate in the 1970s and 1980s, but I am often reminded -- by people older than me -- that this was a period of high inflation and high interest rates.
But what about an even longer period of time?
Paul Schmelzing (visiting researcher at the Bank of England) has a pioneering working paper that was published last year which looks at global interest rates over a 707 year time horizon. His research spans the period of 1311 to 2018 and uses archives and many other sources to try and reconstruct annual rates across the world's advanced economies.
Below are two charts from the paper that I found interesting. The first represents the data that was used to weight long-term debt yields across the various advanced economies. My how things change when you take a long enough view. It also shows the share of advanced economy real GDP that is captured by the study (it's about ~80% -- the red line below).
The second chart shows the headline global real rate from 1317 to 2018. And what Schmelzing discovers is that even when you look across many different monetary and fiscal regimes, real interest rates have never really ever been stable. In fact, when you look as far back as the 14th century, real interest rates have on average declined about 0.6 to 1.6 basis points per year.
So part of his argument is that what we are seeing today maybe isn't all that strange; it's actually expected. For a copy of the full working paper, click here.
Images: Bank of England
Real estate is a highly levered asset class, which means that pricing is sensitive to interest rate changes.
Larry Summers recently published a post on his blog where he argued that the Fed (US) is being far too complacent about their ability to respond effectively to a future recession. He sees this as their biggest monetary policy challenge going forward.
Given the potential impact to real estate and city building as a whole, I thought I would summarize some of his key points:
Private sector GDP growth in the US averaged 1.3% over the last year
Since the 1960s, this level of tepid growth has typically foreshadowed a recession
Larry sees > 50% chance that the US economy will enter a recession in the next 3 years
400-500 basis points of monetary easing is usually needed to counter recessionary pressures
The Feds will likely not have this much room to play with when the next recession comes along
I don’t think anyone could have predicted that rates would remain so low for so long. (10-year Treasury = ~1.6% at the moment.) Still, my view has been that rates in Canada and the US won’t be posting meaningful increases anytime soon. And Larry’s post reinforces that for me.
What’s your view?
This morning, I am looking at the following chart of average home prices in the Greater Toronto Area:
It’s from this Globe and Mail article.
These are staggering numbers. The average price of a detached home in the suburbs (905 area code) increased 21% year-over-year. In the city (416 area code), the increase was 19.6% YOY. These numbers are almost unbelievable.
The article focuses on low supply (decrease in listings) and high demand. And that is certainly a big part of what’s going on here in this city, as well as in many others.
But of course, the backdrop to all of this is our low / zero / negative interest rate environment.
Larry Summers has a great post on his blog (which I discovered this morning via
Levered assets, such as real estate, tend to have prices that are correlated with interest rates. Lower rates usually translate into higher asset prices. We are living through this kind of environment right now. And so it is generally valuable to have a view on where rates might go next.
To do that, it can be helpful to look back at history. And a lot of the time, that look goes as far back as the second half of the 20th century. I wasn't buying real estate in the 1970s and 1980s, but I am often reminded -- by people older than me -- that this was a period of high inflation and high interest rates.
But what about an even longer period of time?
Paul Schmelzing (visiting researcher at the Bank of England) has a pioneering working paper that was published last year which looks at global interest rates over a 707 year time horizon. His research spans the period of 1311 to 2018 and uses archives and many other sources to try and reconstruct annual rates across the world's advanced economies.
Below are two charts from the paper that I found interesting. The first represents the data that was used to weight long-term debt yields across the various advanced economies. My how things change when you take a long enough view. It also shows the share of advanced economy real GDP that is captured by the study (it's about ~80% -- the red line below).
The second chart shows the headline global real rate from 1317 to 2018. And what Schmelzing discovers is that even when you look across many different monetary and fiscal regimes, real interest rates have never really ever been stable. In fact, when you look as far back as the 14th century, real interest rates have on average declined about 0.6 to 1.6 basis points per year.
So part of his argument is that what we are seeing today maybe isn't all that strange; it's actually expected. For a copy of the full working paper, click here.
Images: Bank of England
Real estate is a highly levered asset class, which means that pricing is sensitive to interest rate changes.
Larry Summers recently published a post on his blog where he argued that the Fed (US) is being far too complacent about their ability to respond effectively to a future recession. He sees this as their biggest monetary policy challenge going forward.
Given the potential impact to real estate and city building as a whole, I thought I would summarize some of his key points:
Private sector GDP growth in the US averaged 1.3% over the last year
Since the 1960s, this level of tepid growth has typically foreshadowed a recession
Larry sees > 50% chance that the US economy will enter a recession in the next 3 years
400-500 basis points of monetary easing is usually needed to counter recessionary pressures
The Feds will likely not have this much room to play with when the next recession comes along
I don’t think anyone could have predicted that rates would remain so low for so long. (10-year Treasury = ~1.6% at the moment.) Still, my view has been that rates in Canada and the US won’t be posting meaningful increases anytime soon. And Larry’s post reinforces that for me.
What’s your view?
This morning, I am looking at the following chart of average home prices in the Greater Toronto Area:
It’s from this Globe and Mail article.
These are staggering numbers. The average price of a detached home in the suburbs (905 area code) increased 21% year-over-year. In the city (416 area code), the increase was 19.6% YOY. These numbers are almost unbelievable.
The article focuses on low supply (decrease in listings) and high demand. And that is certainly a big part of what’s going on here in this city, as well as in many others.
But of course, the backdrop to all of this is our low / zero / negative interest rate environment.
Larry Summers has a great post on his blog (which I discovered this morning via
There are always people threatening that interests rates just have to go up. But Larry, as well as others, continue to argue that natural real interest rates are likely to remain close to zero going forward.
Fred mentions Albert Wenger on his blog this morning and I have written about him before as well, here. In his book World After Capital, Albert argues that capital is no longer the scarce resource of our time. Instead, it has become attention.
If you believe all of this to be true, then perhaps the numbers at the top of this post aren’t so unbelievable after all.
There are always people threatening that interests rates just have to go up. But Larry, as well as others, continue to argue that natural real interest rates are likely to remain close to zero going forward.
Fred mentions Albert Wenger on his blog this morning and I have written about him before as well, here. In his book World After Capital, Albert argues that capital is no longer the scarce resource of our time. Instead, it has become attention.
If you believe all of this to be true, then perhaps the numbers at the top of this post aren’t so unbelievable after all.
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