Global Markets: Real Estate

Adam Roth

INTRODUCTION

Over the last few years almost all international property markets have experienced an unprecedented rise in values. For the most part, this rise has been largely due to speculation, rather than a true increase in worth.

While most economics focus on the fundamental supply and demand model to draw conclusions on where the property market will head in the future, they ignore or are not aware of the underlying factors that are the true driving force behind the markets.

SUPPLY AND DEMAND

Whilst it is true that the demand for property will be the greatest influence on property values, we need to assess what is fuelling that demand. Population demographics and regional employment prospects are traditionally used as guides for demand. If there are a large number of young workers or families in an area, we can expect these people will want to purchase their own homes soon and increased employment opportunities in a particular region attract new workers to the area.

These factors mean increased entrants into the property markets and therefore increased demand. But they have been responsible for only a small portion of the massive property price increase of the last few years. Westernisation of economies has been responsible for a large part of the price increases.

The westernised countries with women in the workforce typically see single men and women purchase their own homes before marriage. Many countries have also changed their property ownership laws, allowing cashed up overseas buyers to purchase their local property.

Citizens of the first world countries have been subjected to a swarm of property investment seminars. The gurus show them how it is possible to make incredible profits and the students will follow their advice and purchase anywhere from 1 to 20 or in some cases over 100 investment properties. As the property prices were rising, everyone was making money, but the global financial crisis has crippled many of these investors due to the most important factor behind the price rises – Access to Capital

The Banks are absolutely the main reason behind rise in value of the property markets and indeed will be the main reason behind their fall. Without access to capital, all the above-mentioned new entrants into the property market would not have been able to purchase property and the huge demand increases would have never taken place.

Over the last 10 years, the banks lending criteria was eased so much they approved almost any loan, even if the borrower could not afford the repayments. A few of the changes that took place were:

• Reduction in the amount of deposit required - Typically a bank would lend 80 percent of the value of a property, requiring a borrower to pay 20 percent as a deposit. The amount of deposit gradually decreased to 10 percent, then five percent to no deposit. Some banks even went a step further and loaned up to 125 percent of the property value.
• Relaxation in employment criteria – No longer were you required to hold a steady full-time job over a number of years. Loan applicants who had just started a job or were even working casually were approved.
• Elimination of the need to prove income – Most countries governments had regulations requiring proof of income. Solid proof in the form of payslips or bank statements were no longer required, instead just a letter from the employer or accountant was accepted, which often contained fabricated figures. Later the banks, introduced lo-doc (low documentation) loans where it was possible to just sign a form declaring your income, meaning the loan applicant could declare any income figure they wished without being checked.

It seemed that no property investment could fail and anybody could get a loan and make some money in property. But the system could not last forever. Many people could not afford the repayments from the beginning and when interest rates rose, properties were being foreclosed and repossessed in record numbers. This was the beginning of the global financial crisis that we are experiencing today.

A critical evaluation of the reasons behind the global financial crisis placed the majority of the blame on the banks system of interest lending and relaxation of their lending criteria. A tightening of bank lending guidelines and a conservative lending approach has resulted in a large number of loan borrowers now no longer qualifying for lending. Without these participants in the property markets, demand has subsided and in turn the prices are plummeting.

CURRENT SITUATION

The housing price rise has been so drastic that property is now unaffordable for most people. The housing affordability indexes are at their worst levels since the introduction of this statistical category.

Investors trying to make a quick profit have been flooding the markets and driving prices to unsustainable levels. We have now reached the point where a typical family can no longer afford to buy their own home, or if they do, they become stuck in a debt trap with a reduced quality of life.

Homeowners have been mentally conditioned by the media to employ a certain mindset when it comes to housing. First of all, they believe that everyone must own their own house and that renting is dead money. Even during previous economic recessions, homeowners only used around 35 percent of their income to pay for their house. Now the average is over 50 percent in many areas as they are reluctant to let go of the dream of owning their own home.

The misconception that renting is dead money is a belief that is hard to shake. People seem to forget about the extra homeowner expenses incurred such as local, state and federal taxes, extra insurance responsibilities and property maintenance. In this current economic climate, it is financially far more advantageous to rent, rather than buy property.

Secondly, most of the population, especially the younger generations believe that it is not possible for housing prices to fall. Housing markets have crashed many times in the past, but these price falls are widely unknown to most people. Even upon mention of these incidents, the common arrogant response is that it won’t happen again.

In late 80’s and early 90’s most countries experienced a housing price downturn following the stock market crash in 1987. Australia fell around 20 percent, UK 13 percent, Japan 35 percent and New Zealand had a reduction of around 50 percent. History shows that no country is immune from a housing price crash.

Recent statistics show that the housing bubble has burst and in many countries the prices have already started to fall. The following statistics from the Knight Frank Global Housing Price Index paint an interesting picture of the state of the current international property markets. The index measures changes in housing prices for 42 countries worldwide, of which 34 countries are showing non-positive figures.

Country Annual % Growth
Israel -0.2%
Japan -0.7%
New Zealand -2.2%
Germany -2.5%
Malta -2.7%
United Kingdom -3.9%
Ireland -8.1%
Denmark -9.6%
Lithuania -9.9%
Estonia -16.0%
United States -16.8%
Latvia -24.1%

In other countries where prices haven’t fallen yet, housing price growth is on the decline.

Country Change in housing price growth
Norway -95.7%
Malaysia -80.0%
Switzerland -76.5%
South Africa -75.5%
Netherlands -69.4%
Greece -59.5%
Spain -58.6%
Sweden -58.3%
Finland -56.9%
France -52.9%
Russia -50.7%
Luxembourg -50.0%
Canada -47.3%
Belgium -37.3%
Indonesia -37.1%
Singapore -35.3%
Austria -29.9%
Croatia -15.9%
Australia -10.9%
Columbia -2.3%
Iceland 0.0%
Italy 0.0%

CONCLUSION

We should expect housing prices to continue to fall in the near future. At best housing price growth will become stagnant or minimal. The public should not expect to make a profit from investing in property markets for a number of years.

Astute investors may still be able to generate profits in property by employing a careful selection process or taking advantage of panicking homeowners overeager to sell. Individual areas may also increase in value if they experience factors such as high employment availability.

But overall a gloomy cloud is hanging over the worldwide property markets. The smart money suggests it is time to cash in your profits and wait for the wave to pass through.