Wednesday, 6 November 2013

House Market Stumbling into a new Era?

Shock horror to a few people we know well, that their houses are not worth squillions over what they paid for them, and worse, for those with interest only payments, the house is now in negative equity!

Is this the start of a new era of falling house prices and property becoming a poor investment?

On the first point, not an era . yet. For now this is a correction as banks just won't lend 100% for first time buyers who present the biggest risk to them in defaulting.

This has a very immediate knock on effect to the market and it works like a steep pyramid at this point thus:

First time buyers tend to be on a metropolitan and suburban basis, youngish people buying a flat. Second homers of the geo-socio-demographic tend to be those who have just become parents.  Here you have the first multiplier- two flats to sell which makes for a large amount of capital paid down or gained over the years - and we are having those kids and those three bedroomed properties later.

In order to move up, they have to sell at a profit and of course actually sell on time to avoid bridging loans and uncertainty. It is this key multiplier which has put the brakes on the housing market and caused many sectors of the market to fall in value for the first time in two decades.

The older key mulitplier of days of yore in the 1970s, 80s and 90s was that when wages go up x% points, mortgage borrowing goes up x% x 3 because we can borrow on three times income. That was trashed about in with on the one side big capital gains and disequity across geographical areas, and then dodgey mortgages on 5 times individual or couple's joint income.

This correction in the market comes as a surprise to many, but we have seen similar  before in the 80s , 90s and around 2000-2003 depending where you live. Those falls were caused in part by over-valuations and overloaning too, but the gap being one step up in the market that suddenly property values were so vastly over geared to annual average incomes that a proportion of the population in the areas affected were either stuck with where they lived, unable to move up, or like me stuck with having to rent and share apartments to be able to save up for a mortgage.

The belief system is still there that housing is a good SHORT term investment amongst the public- you get a capital gain and alter your gearing, and your wages or other income rises allowing you to go on with the rat race until you have an appropriately sized cage to bore everyone to death in.

However it may be the banks and legislators who now actually put water on this belief system, and turn home ownership once again into a longer term investment. Governments in many countries or regions of countries with economic up swings over the last decade, have been involved in freeing up land and allowing for more provision in the market, while unfortunetly the developers understand a lot about gross margin but zero about demographics and have built endless yuppie rabbit hutches across the western world, and to some extent probably in the east. The hang over from this will be that there can be more building once the correction runs its course- this will mean developers are less likely to get rich quick, more run a reasonably profitable business based on hard work and good knowledge of the market socio demographic. Also unemployment in this sector is still rising in many countries because there was a hang over of projects (read rabbit hutches) which institutional investors amongst others were patient enough to run out the finance crisis,-  which suggests something acute rather than what it turned into - a chronic failure in the ideologies of the free market to function without more 'federal'  governance. So there is a scene set to have quite a lot of supply in rabbit hutches, and developers who see them standing empty and families trying to shoe horn themselves in, and then look to actually listening to the market and building to the demographic. Major employers will put pressure on local and national politicians to plan or free up land as the ideological dogma would presuppose. You then have labour available and cheaper than before for a while.

There will be booms and bubbles again, but a lot of people on interest only mortgages are going to be looking in their midterm to the need to pay capital down to avoid negative equity and to increase ROI. ..

so given the two above as "for example" in a scenario build you could then throw bones and tea leaves and say that there will be now a longer term adjustment in the western world, especially in some of the very over valued "provinces" .. I ramble but there will maybe be then a long term correction in enough of the market as to render the property shine into a dull glow and as I say, return home and property to being a long term, responsible and low risk investment instead of a short term, high reward, high risk invesment in enough of the populations to affect this change.