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Prepare for Property Prices to Fall Globally
Prepare for Property Prices to Fall Globally
At the start of the New Year, there are increasing signs that the recovery seen in property prices in many cities in western countries -- namely New York and other U.S. cities, and Dublin, London and other UK cities -- is beginning to peter out.
Many cities have seen speculative frenzies return in recent months which led to price surges which would appear to be unsustainable – especially given the uncertain and poor geopolitical and economic backdrop.
This has been the case in the UK and Ireland, the U.S. and indeed in Canada, Australia, New Zealand and a few other markets.
The question at the start of 2015, is whether we are likely to see continued price gains or falls. There are all the hallmarks of an echo bubble akin to the one that burst so painfully in the noughties.
In the UK, the respected Centre for Economic and Business Research (CEBR) has predicted a decline in British property prices this year. Prices rose 8.8%, on average, in 2014 with prices in London ballooning another whopping 20%.
The CEBR, one of Britain’s leading forecasters, expects overall declines of around 0.6% with the London property bubble to burst and prices likely to fall around 8%.
With this forecast they are breaking ranks with banks, estate agents and the UK Treasury’s “independent” forecasting unit, the Office For Budget Responsibility (OBR). The OBR is touting another rise of 7.4% this year.
We would regard the CEBR’s outlook as the more credible. As covered here previously, London prices are unlikely to be sustained into the near future as Russian, Chinese and Arab money is no longer gushing into the London property market. Also, average homes in average areas are now beyond the reach of working husbands and wives on average and even good incomes.
The average house price in London is £514,000. The median UK income is £22,044 and the median London salary is £35,438. Thus, the average house price is 14.5 times, the average salary.
Overall, new rules over mortgage lending and a glut of sellers have stalled the rise of London and UK house prices.
Other evidence also points to price falls. Zoopla, the respected property website has said one third of all UK properties on sale today have seen their asking price lowered at least once since coming on to the market.
Another longer-term factor which should begin to weigh in on the side of declining prices is potential rises in interest rates globally.
In the UK, the current, unsustainably low level of near 0 percent is likely to come under pressure soon. Bank of England governor, Mark Carney, indicated early last year that he expected rates to rise to 3 percent within three years.
In Ireland, house prices fell 1 percent in the final three months of 2014, according to the latest reports. This is the first time since mid 2013 that the average house price fell compared with the previous quarter. Prices fell nationally and in the capital Dublin, where prices fell by 0.7 per cent, the first drop there since mid 2012.
However, prices remain substantially higher than a year previously as a result of another surge in prices in the first nine months of the year. Prices also remains multiples of levels seen in the early 2000s.
Annual inflation in the capital has eased from a high of a very large 25pc in September to 20pc in December.
As in the UK, sentiment appears to be shifting and potential house buyers may have lowered their expectations of the amount they can borrow in light of a proposed Central Bank of Ireland measure to prudently place limits on mortgage lending.
Concerns about the impact of the geopolitical crisis with Russia on the European economy and the return of the Eurozone debt crisis may also be impacting sentiment.
In the U.S., the Case-Shiller home price index, released on December 30 showed U.S. single family home price appreciation slowed less than forecast in October and there are signs that certain markets are topping out.
What many fail to realise is that the “normal” very low interest rates of the last fifteen years are actually and absurd historic anomaly. Prior to the dot-com collapse interest rates in the West averaged and were regarded as normal at around 6 percent to 7 percent.
A sixfold rise in rates from 0.5% to a meagre 3% would devastate home buyers in many countries internationally.
Since the dot-com crash the West has adhered to the Greenspan model of ultra-low rates to stoke consumption and asset speculation through cheap credit. Savers and pensioners have been punished in order to protect the interests of debtors including over leveraged banks.
Zero percent interest rates or ZIRP for an extended period have discouraged saving and encouraged reckless lending, borrowing and speculation. Previously, rates were determined primarily in the bond markets and not by central bank diktat.
This has contributed to the very precarious financial and monetary situation we find ourselves in today.
The ability of central banks to determine rates cannot last indefinitely. Rate rises are on the cards in the U.S. and globally. This may not occur in the short term as there is the potential for renewed QE in the U.S., but it will happen in the medium and long term.
Should the U.S. be forced to renew QE, it has the potential to create a dramatic loss of faith in the dollar as reserve currency and could result in capital flight. This in turn may force the U.S. and other western countries to raise rates despite the very negative impact that would inflict on property and stock markets.
Sentiment is a powerful thing in all markets including property markets. Sentiment in property markets tends to change more slowly than in more liquid, traded markets but when it does, it is as powerful a driver of prices.
Easy money has inflated property prices throughout the world. House prices are losing touch with reality again. Sentiment appears to be changing.
Beware of the property froth and prepare for the economic pain when prices begin to fall.
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Same goes for the major cities in Asia (China, Hong Kong, Singapore). Some of these are the most expensive cities in the World.
Key to measuring the sustainability of such prices lie in the houshold debt/GDP where these are at critically high levels in HK and Singapore.
In general, the tide of printed monies have floated up real estate prices proportionately more than equities/bonds in Asia (ex Japan).
Let the massacre begins.
I'll tell you the truth...
There can't be any kind of sustainable return to sound economic life until the inane shack racket is crushed once and for all.
And I mean crushed.
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Detroit can handle the decline.
I left school in 88. The wages when I first ever walked into a job centre were very little under what they are now. Lads in factories took home £160-£200. Skilled £250-300.
I could fill the car to the brim, fill a trolley of shopping to the brim and pay a weeks rent with half my wage, most people can't do all three of those things now with a full weeks wage.
We have been dry power bummed in a massive way. We get what we deserve (en masse) however in many/most ways, through our selfish egotistical consumerism and blind stupidity. Personally I am giving up trying to convince any of the sheeple anything, I'm just earmarking them for ridicule or robbery when they lose it all, f...... dicks!
UK and Ireland, the U.S. and indeed in Canada, Australia, New Zealand.
Umm lets see what relation have most of those? Oh Queeny and the Commonwealth. It is clear the ponzi has been supported since 2008 by massive leverage in housing derivatives. Simply put if housing falls the banks will fail as they have lent so much created debt money to everyone man and son, and his son's son.
The village I grew up in had a hardware store, a fish and chip shop (english for 3generations), a BP garage, 2 news agents, a baker, a bank, 2 greengrocers.
Today the greengrocers, baker, hardware store, BP garage an 1 news agent are gone. Tirkish people run the chippy and they cant cook. Most strikingly, the 3 and I'll say that again 3, Estate agents are doing well. People walk past the windows, looking at their bank balances increasing with every passing year.
Change is long over due...
So what are we to do? Buy gold and hold for $50,000/oz?
Yes! And I have only a few ounces left - RIGHT NOW! - at the low, Low, LOW price of $40K/oz!
Hurry! These deals won't last!
Won't happen. I know this because I am a renter with cash waiting for the prices in the DC area to drop for the past 18 months. Prices in one of the slowest markets in years are flatlined going nowhere atm. Spring gets here and guaranteed they will start north again. Timing this next crash is unbearable stuck in this nasty rental trying to wait it out.
Well it definitely won't happen in DC. Or anywhere else that is so close to the magic fountains of fiat.
Good, one more step in breaking up the public unions that threaten to sell your house to keep a job.
I'd love to put our house on the market and ask for payment ONLY in 400 oz Gold bars
Thats a big house dude!
(At 50k an oz)
He's talking 'ask'.
Global real estate prices will grow higher.
Sans a global plague or widespread nuclear war or an American takeover of Congress Real Estate prices are going up even in Syria. Bill Gates investment in Egyptian cotton land has gone up too.
a few things wrong with the ever expanding real estate market, and one is peak population. sometime soon the number of people being born will not equal those dying off. then new technology makes the home owners less dependent on infrastructure, and government regulation. mass produced housing is going to be a thing of the past, and people will be able to live just about anywhere they choose regardless of electric lines, or water lines or highways.
The only mod I'll add to your comments, is "peak population" of good paying jobs.
If the % growth of good paying jobs is rising, the RE near those employment centers tends to rise, especially if the area is land locked, e.g. Washington District of Corruption and SillyCon Valley.
Given the clusterfuck of a financialized world-wide economy, I think peak population is coming sooner than expected. Especially since student-loan debt-enslaved Millenials are not forming households.
good luck with that....
http://www.worldometers.info/world-population/
So in a purely fiat system, those who have the ability to stabilize prices will sit back and let the world crash?...and all this while the whole world knows they could fix it?
I don't think so. I think printers will print. Even if it destroys the very currency they make, they will do it because it will be what the people demand. Important people will not tolerate destruction of their 'wealth'...unless it is by hyperinflation. That they understand and are prepared for.
That will happen when the Chinese run out of stolen money. Heh.
after prices fall credit will contract. this is what happened the first time around, and all Bernanke did was delay the outcome. the Fed will continue their efforts to control credit rates, assuming the real or intrinsic value of these homes remains the same, the equation would shift the balance of the added value to the mortgage side of the equation. a home worth 200000 in a easy credit environment, when it falls in value to 100000, then credit tightens (despite the low rates).
RE prices need to fall 80-90% - else ordinary people can never afford to live indoors.
If we had a genuine market clearing this could happen. People are going to figure out sooner or later that the FED cant raise rates by any discernable amount without busting the government. Keep some powder dry.
Downsize to a single wide.
Lower prices on property will only hurt investors. If you are actually LIVING in the home, nothing really changes. The house remains the same, regardless of what the assigned 'value' may be. And if the so-called value tanks, then push hard for a tax reduction.
Do whatever you can to reduce your monthly cost, but remember that as long as you make your payments, you won't lose the house. You have to pay something to live somewhere, may as well stay put.
Investors will take heavy losses, but live-in owners only have to hang on, because even if the paper 'value' goes to zero, the house remains and can be lived in, which has value in itself.
Stop focusing on some arbitrary numerical 'value', that's what THEY do, and they will be crying no doubt. But where THEY have losses, YOU still have an actual real-world asset that you can USE.
Only for those who own their homes outright.
"If you are actually LIVING in the home, nothing really changes."
Except one thing: you're paying $3K/month, for example, to "own" an underwater home, and if you moved into the vacant next door you'll be paying $1500 for the same thing - month after month. $1500/month (or whatever it will be when the market craps out) is a lot of money to most people.
Yeah, the new Section 8 neighbors that Obama be gwine to help move in next door to you may talk loud, deal crack, and play R&B till 4am every night. But you'll get used to it. Just bake them some cookies.
Some investors could care less about paper value. It's about the cashflow.
Bingo. As an investor for the longer term, the most important thing is cash flow. It does not matter what the property is purportedly worth. What does matter is how much it throws off net each month. You'd like to see a higher assigned value but what you are looking for is money coming in the till each month. The mileage may vary for investors who have a shorter time horizon, particularly flippers. I would classify them more as speculators, not long term investors.
If paper values tank, so do rents. How the fuck does that not affect you cash flow??? Math challenged, wannabe RE moguls are about to get slaughtered.
Actually, that didn't happen the last time around. The last housing crash saw rents increase over time. A lot due to people burned by the housing bubble wanted to rent instead of getting burned again. Supply and demand works. Rent prices keep going up.
That was not true on the Macro. Rents fell until the recent Bubble 2.0 maddness made buying unaffordable again.
If paper values tank, mortgage debt gets paid off easier by converting gold to pay off debt. No debt service goes directly to bottom line. Also, your argument rests on the notion that wages stay stagnant in an inflationary environment.
If house values tank, gold likely pulls back as well so that's arguable. And not everyone is sitting on gold. And who said we're gonna have inflation??? We've had stagflation and the only other option id deflation. The FED is going to let deflation run in RE (commodities are already tanking) so that spending can rise without wage increases. It's the only way to keep PE values of the stock market even remotely sane. if the FED could create some wage inflation they would have already. They've been desperate for it since 2008.
Timeline: Historical Gasoline Prices 2004 [~$1.46]- 2015 [~$1.46] *Note:: 11 yrs. only
Timeilne: A History of Home Values Note2:: Chart prediction for 2012-15 is spot-on [jmo?]
http://www.gasbuddy.com/gb_retail_price_chart.aspx
http://www.ritholtz.com/blog/wp-content/uploads/2011/04/2011-Case-SHiller-updated.png
If you don't have the cash flow - you can't play.
Cash flow is the ante.
Paper value does count though. For example, I'll offer you a bank accout with $1M in it or a bank account with $1 in it. Paper value both, but I know which one most people will choose.
it hurts to hold an underwater mortgage, on the other side property taxes go down. the alternative to mailing in the keys is reentering a market where credit is tight. so if you have a loan you can keep your loan might be the slogan. a home is a consumable, you are correct there, no different than a car. at the end of its life the product has zero value, except for land or scrap value. the one thing that ruins your just get by plan is that new technology in home building will lower costs and improve the product. you dont want to end up with a thirty year mortgage on a 1980 buick skylark.
Zero stars for this article. Yah. Right. Like the Chinese billionaires will run out of stolen, extorted money now that the West has stopped printing new money. Right.
CEBR knows nothing.
....sssssssssssssssssssssssssssssssssssssssssssssssssssssssssssssssssss......................bloop!
So... People in Dublin actually have jobs and the like?
Hmmmm...
I've always been amazed about the real estate prices in London, having been there I really think the population needs to seek psychiatric help....
If you're an oligarch billionaire, the UK and its City have some great tax laws on the books, just for you.
Some tax rates are only for little people.
I recall hearing that the property tax in the City is capped at £2700.
Sweet deal for the .01 percent living in the corporation.
Note, there are very few houses in the "city of london" which is a small area within London proper.
property tax is fixed the same way all over the country. there are several bands based on the value of a house from 1989 i think. this is called the rateable value and against this is charged a percentage whicjh varies by local government. the nice thing for owners of expensive houses is that the top band is capped so the top rate is the same for a 1m house or a 50m house.
On this note, if you are in the US and in a down market, consider appealing your valuations for the sake of paying less property taxes. You may have to show up to the hearing, but it is well worth the effort. You can also usually find the info/docs needed on your assessor's site.
http://www.bankrate.com/brm/itax/news/20030806a1.asp
It's where the banks are. And where the people who run the banks are. And, those people runs banks all over the world, including the Federal Reserve.
People love going to London for their gourmet Kidney pies, right?
The term "gourmet Kidney pies" is a redundancy!