|
|
|  |
The Hansel And Gretel Property Market
By Ian Fife, Property Editor for the Financial Mail
23 September 2005
Interested in hearing Ian Fife speak?
Ian will be in London on the 30th of October talking about the state of the South African property market.
Click here for more information...
Luckily most young South Africans working in London can’t afford to own a
decent home here, so they won’t be caught in what looks like global
property’s vicious non-cycle.
Investors identified the Goldilocks global economy in the nineties; not too
hot, not too cold, just right. And it led to the greatest property boom in
history.
Now they can talk about the Hansel and Gretel property market; trapped in
what at first sight seems a mouth watering (remember the ginger bread
house?), endless, low interest growth phase by a wicked witch.
The wicked witch is the group of emerging eastern exporters like China and
India flooding the world with low cost goods, pushing inflation down and
building up huge trade surpluses, reinvesting them in dollar funds and
keeping interest rates at (by one calculation) a 300-year low.
Property cycles usually work this way:
- the central bank drops interest rates because the economy is
stalling and inflation is likely to drop below its lower limit;
- investors and consumers respond to lower interest rates by borrowing
more and buying shares, homes or consumer goods;
- property prices go up;
- people feel richer and borrow even more;
- inflation starts rising as buying becomes frenzied and drives demand
ahead of supply;
- the central bank worries that inflation will shoot ahead of its
upper limit, so it hikes interest rates;
- the market crashes and the cycle starts again.
The world was waiting for the Bank of England’s interest rate to rise to
5,25%, the magic threshold at which debt ridden Britons would give up the
ghost, the property market would come tumbling down and we could all believe
in property cycles and apple pie again. But, as we know, it started going down
again at 4,75%.
Powerless to bust and quickly clear out the over-borrowed, over-paying investors,
the global property boom could go on until, in the words of South Africa’s
First National Bank chief economist Cees Bruggemans “it beats itself to
death in a lazy, meandering” worldwide glut, with declining incomes and
falling values.
House prices in Britain and Australia have hardly fallen. Australian
household debt remains at a record 130% of annual household income and could
start rising again within 18 months.
Nowadays, central banks have decided that it is too difficult to identify property
bubbles as they are inflating. They’ve decided to limit themselves to
dealing with the consequences of a crash instead.
Not everybody agrees that a crash will be avoided. I admire London’s Capital
Economics who continue to warn that a hard landing is still possible. “The
UK and Australia housing markets look overvalued despite the sharp drop in
house inflation,” says their housing market update of September 1. “ It’s
likely that falls recorded in some parts of each country will become more
widespread.”
But within 18 month the effects of falling interest rates could be rising
prices again.
The U.S. Federal Reserve is expected to continue hiking interest rates as
the house buying frenzy continues, with average house prices around £120,000
– a record 55% higher than they were five years ago. But they are
unlikely to go beyond 4,5%.
It is all very well to warn people about the risks on the property market. But
where should they put their money? The stock exchanges are underperforming and
savings rates are also at 300-year lows. So they just keep buying property..
Constant investment demand and new development will lead to a glut of space
to rent and falling investment incomes. And despite continually falling yields,
prices will eventually start dropping. This type of property deflation is
far more difficult to overcome than a short, sharp recession.
Take Japan: residential land prices have fallen 33% in 15 years (to about 50
Pounds/ sq.ft.) and 65% in large cities. Commercial land prices have fallen
87%, according to Credit Suisse First Boston. Recently you could buy a
Japanese factory on a 7,5% yield and get a bank loan at 2,5%. But your
return each year would be falling and create capital losses. Eventually the
return would drop below the 2,5% borrowing cost.
Bruggemans sees three key long-term global trends. “The mother trend is
economic growth,” he says. “Goldman Sachs projects the American economy
increasing 2½ fold by 2035 or 2040, from $12 trillion to $30 trillion and
the Chinese economy growing about sevenfold also to $30 trillion.”
The second trend is a long period of low inflation caused by “the unlocking
of low productivity farm workers to become high productivity office workers”
in China, India and elsewhere. This will be accompanied by massive migration
to the cities – for instance, by 400 million Chinese over the next 10 or 15
years. Urban land will become scarce “which presumably means prices will
continue to rise” and there will be enormous demand for residential and
commercial space.
Third is demographic change, particularly declining populations in Western
countries, particularly Europe. A recent book estimates Europe’s population
will fall by 50m to 400 million by 2050. Which will be accompanied by
stagnation and declining space demand.
But South Africa – and some other countries -- are different. I’ll tell you
why next week.
--- Ian Fife is property editor Financial Mail, the SA weekly magazine
Interested in hearing Ian Fife speak?
Ian will be in London on the 30th of October talking about the state of the South African property market.
Click here for more information...
Keep abreast of the latest property market news. Subscribe to the IPS Newsletter:
Our preferred partners:
|  |
| |
|
| | UK: +44 (0)208 971 3245 |  | SA: +27 (0)11 880 5340 |
| | |
Invest in the most sophisticated property market globally. IPS has the total solution for investing. Want to know how? 
This concise and easy-to-read book covers just about everything (tax, costs, finance, legal entities, etc.) that you need to know about buying a property in S.A.
R 10,500,000