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AApr 8, 2013

Why America Is Still The Land of Opportunity

Andrew Hallam

Despite America’s suffocating debt levels and (what many consider) its self-defeating government policies, more foreigners than ever are wishing they were American.  No, I’m not talking about Cubans launching dilapidated boats bound for Florida.  Nor am I talking about lottery green card wannabes from impoverished nations, desperate for their own piece of the American Dream.

I’m thinking about nationally proud young people who wouldn’t normally admit their envy for the land of Stars and Stripes:  Brits, Canadians, Australians, and Europeans.   So why the sudden affinity?

Hard-working young Americans can afford to buy homes—and invest.  Much of the rest of the developed world looks on with envy. 

According to the National Housing Affordability Index, U.S. homes are cheaper today than they have been since records were first kept in 1970.  An index score of 100 is the benchmark for the median household to qualify for a median priced single family home.  This assumes a 20 percent down-payment and 25 percent of the household gross salary directed at mortgage payments.  In November, 2012 the index stood at 198.2.  In other words, houses are cheap when factoring current mortgage interest rates.

But how do prices of U.S. homes compare internationally?  The Demographia Housing Affordability Index ignores mortgage interest rates and compares home prices to household incomes.  If the median home sells at a price that’s three times household income or less, it’s deemed affordable.  Median prices exceeding 5.1 times median household income are rated extremely unaffordable.

Severely Unaffordable: 5.1 & Over
Seriously Unaffordable:: 4.1 to 5.0
Moderately Unaffordable: 3.1 to 4.0
Affordable: 3.0 & Under

When ignoring low mortgage interest rates (which this index does) the median U.S. home costs 3.1 times household income, making it moderately unaffordable.

But it’s still the cheapest global housing market among the eight countries compared.  For example, Canada’s homes cost 16 percent more; Great Britain’s homes cost 65 percent more; New Zealand and Singaporeans pay 71 percent above U.S. levels; and Australia’s homes are 81 percent costlier than America’s market.

If you’re looking for a home in a metropolitan area, you’re even luckier to be American.  Nearly 40 percent of U.S. cities, with populations exceeding 1 million, are categorized as affordable.   If you try searching for an affordable metropolitan area outside of the United States, you might be surprised.  Based on the surveyed countries, none exist.  Not one.

 

It’s not just the lower relative U.S. home prices that have many young foreigners drooling, it’s the idea of a 30 year fixed rate mortgage. 

In most countries, mortgage rates can only be fixed for a period of time.  Typically in Canada, it’s a five-year term.  You could find a 4 percent mortgage in Canada, only to see it rise five years after the contractual ink dries.  When Canadians renew their mortgages after their five-year terms, they’ll pay higher interest if global rates increase.

 

America’s reputation as a land of opportunity also holds true for its financial service companies.  Dig a little (it doesn’t take much) and you’ll find the U.S. has the lowest cost investment platforms in the world.

David Swensen, Yale’s endowment fund manager, once lamented the unfairness of America’s actively managed fund costs, suggesting that government action is required to lower them.  As high as they might be, however, they’re cheap by international standards.

In 2008, Oxford University Press published a study comparing international mutual fund costs, including estimated sales fees.  Average U.S. expenses were 1.53 percent. In France they were 1.88 percent; in Germany, 1.97 percent; in Switzerland, 2.03 percent; in the UK, 2.28 percent; and they were 3 percent in Canada. 

Low cost index funds are considerably cheaper in the U.S. than anywhere else in the world.  This gives Americans far greater wealth-building potential than their international counterparts. You could build a diversified portfolio of Vanguard index funds, for example, and pay expenses of 0.15 percent or less.

The cheapest index funds in Canada (TD’s e-Series products) cost five times more than Vanguard’s Admiral index shares.  And Toronto Dominion bank makes their lowest cost products very difficult to buy.  

But it’s even worse, elsewhere.  In Singapore, their lowest cost index funds charge roughly ten times more than Vanguard’s cheapest options. 

So despite its woes,  America still provides (whether by design or not) some of the greatest wealth building potential for young people anywhere.  They’ll just need the grit and discipline to take advantage of it.

Filed Under: Foreign Perspectives