Most of the western world, if not the entire first world, seems to be reporting that property market price inflation is decreasing or stalled. In the worst-hit areas we even hear tales of a lowering of house prices and negative equity for some unfortunate new homeowners who jumped on to the property bandwagon at the peak of the recent property boom. High Street inflation never lets up, so it's natural for property investors large and small to feel that the end of the world is nigh.
This state of mind is undoubtedly an over-reaction. The human psyche drives modern man to ensure he has a place he can call home in the shortest possible time after leaving his childhood days behind in the former family house. Fair enough - but does this man of our times actually have to own his home outright, in theory at best? And more tellingly, does this man have a god-given right to expect that with home ownership comes enough lifetime's wealth to be able to retire from working for an income at his chosen time? The latter scenario is a common desire, and it is based upon the premise that property values will always rise faster than other commodities.
We are now finding in Ireland and elsewhere that we have come to the end of a period where property value inflation was outstripping general living cost rises. But we should not be surprised because we have had these ups and downs before. The general trend though is that property prices commonly rise again fairly rapidly after periods of stagnation. It's all about supply and demand.
The demand for new homes or at least of people looking to move house will never cease. Why? Because many old homes become dilapidated for a start. Then we have the new young families who need their own space and cannot expand into the limited environs of parental homes. On top of that, the modern world economy relies upon many workers who must be mobile throughout most of their working lives, thereby prompting housing development and property transactions countrywide and often internationally. And don't forget those that opt to upgrade or downsize by choice due to family or personal needs.
What about the supply side? The builders can't build fast enough in boom times because handsome returns on their property investments are almost guaranteed. If landbanks are purchased just prior to a stalling of property sales prices, then naturally there is no rush to build and sell at reduced profit margins. So any oversupply rate reduces until it balances demand. This is the period being experienced in many parts of the US and Europe at present.
In Ireland currently, un-named property commentators repeatedly get column inches reporting that house prices have dropped by nearly 10% in just 12 months. This type of statement is more than likely associated with party politics prompted by the Irish government's opposition rather than informed economic commentary.
Let's take a quick look at what the 'Irish House Prices in Freefall' sensational headlines really mean when based on the 10% drop in a year statistic. The house price index is based on sales closure prices, not size of property or land acreage; these latter factors generally tend to grow on average at a moderate rate over each decade because we all want bigger and better homes regardless of our individual domestic needs. So bear in mind that the average price of a house per country tends to grow because the asset is getting bigger as well as reflecting local general economy inflation.
In Ireland last year, the average price of a house had risen incredibly to over €300,000 from nearer to €200k a decade earlier. That statistic is part of the local Celtic Tiger boom folklore which lending institutions rammed down our throats when selling home loans and risk-laden mortgage deals up until just a few months ago. The 2007 €300k average home was a bit bigger and better than houses available in the year 2000, but it was obviously grossly over-valued in real terms. It didn't cost that much more to build than the average house completed and sold in 2000, evidenced by the great numbers of new self-builders who wanted a share of the money-spinning action.
In mid-2008, the average price of a house in Ireland is €275,000. This seems to be getting closer to a sustainable valuation (if you seriously want to sell, that is) for the average property size available which is typically 3 bedrooms, multiple bathrooms and all the latest mod-cons. A bonus in rural Ireland is that you might even get a generous half-acre of land thrown in.
So the 'sensational' loss of over €25,000 on average off every Irish homeowner's wealth is not a true loss as such at all. It is just a realisation of long-term property asset value. Anyone who spent their invisible extra €25k in less than 12 months was a greedy fool, and we shouldn't have any sympathy for them if they don't display the caution and prudence of serious property investors.
Anyway, it will not be long before the local property market detects the first signs of increased demand again. Sellers will start hiking up prices and the whole cycle will slowly start to revolve again in our favourite upwards direction.
So the conclusion is 'don't panic' and take some time to reflect on why existing homeowners feel uneasy every time this cycle reaches its low point.
Property is a reasonably sound investment, and it gives the buyer the obvious immediate attraction of having somewhere to live (or work in the case of commercial premises). However there are other ways to exist comfortably which don't involve organising your life around the demands of meeting hefty monthly mortgage repayments and fretting about why the value of your property doesn't always rise at a consistent rate.
Many young people are opting to rent property. The so-called home-owning critics immediately shout that house rent is 'dead money'. To a degree, yes, but if renting frees up income to invest in markets which don't fluctuate in boom & bust cycles, then isn't the oft-struggling mortgage payer something of a hypocrite? And who actually owns the majority of private domestic homes anyway? If a homeowner misses a mortgage payment you soon find out that the big financial institutions cold-heartedly treat lenders as no better than tenants of real estate upon which their businesses are founded. And furthermore, as tenants with much less rights than conventional renters of property who have fair and equitable rental agreements with their landlords to rely upon in times of hardship.
It's interesting to note that in previous generations the majority of house dwellers were tenants, particularly in towns and cities. Most homeowners can probably quote that their parents or grandparents lived in rented accommodation, and that is a reason why they strive to ensure that they and their dependants have the security of home ownership. What security, if you worry about why your investment and lifestyle is not always as good as you dreamt? Our ancestors survived, without the disposable income levels of today, so perhaps the property rental option should not be dismissed so readily.
Maybe the biggest lesson to be learned by property investors when global economy growth recedes is that only a few property types are guaranteed to grow in value (in the longer term) at a rate generally in excess of other inflationary factors. These are the well-maintained properties in desirable locations whether they be urban or rural. Funnily enough, my experience tells me that these properties are likely to fall into the cheaper price category or the other extreme, the high-end luxury home. The middle range property, by its very nature, forms the bulk of property sale listings, so the seller struggles to promote his property above the multitudes of similar priced homes or sites.
I suppose it can be summed up as follows:
- First-time buyers, transient workers, students and 2nd home buyers will always provide a ready market for low-end 'affordable' property, particularly in urban settings.
- High earners will always want to upgrade to luxury properties in secure and private surroundings, particularly in established districts of like-minded people.
- The rest of us, by far the majority, continue to buy or rent in the mid-price range through necessity of location or finance limitations and a natural desire to match or slightly better our neighbours' lifestyles.
Property buyers, renters or vendors in all three of these categories can benefit greatly from registering with web-based property advertising portals such as my own site (www.Propertysteps.ie). The exclusive luxury homes and the lower-end smaller properties are instantly brought to the fore from hundreds of listings by easy-to-use search functions which detect price range and/or location. The more attractive middle range properties also benefit in that household features and property type listings enable the website browser to easily compare the best value for money of numerous properties in a chosen location.
In Ireland, where we are based, I can report that Property Agents say that websites such as ours have contributed greatly to stability in the mid-price range domestic property market. Sale closures in this category, for sensibly priced houses, are regular and commonplace, thereby propping up the market in general. This contradicts the doom & gloom reported in the media, no doubt created by 'worried' homeowners who aren't even active in the buying and selling of property. The lazy expectation that easy money can be made simply by buying and living in a home for life smacks of greed, not reality. These merchants of doom should be ignored.
We also read in the press about the owners of expensive houses for sale having to dramatically slash prices to arouse interest. Probably, not maybe, the asking price was unrealistic and based upon outdated market value. The eventual selling price of a luxury home will still have made the purchase a sound investment if it was bought at any time except the very peak of the recent boom. Again, I can report in Ireland that Agents say that there is still a waiting list for desirable upmarket properties. The best of these homes are sold via website mailing lists or by the uploading of the property brochure to Propertysteps.ie and similar internet property portals.
For a fraction of the cost of press advertising, our best value for money website gets quick results. Often you never even see a For Sale sign being erected for property in the more exclusive address category, yet new occupiers appear and everyone involved in the transaction is delighted. You don't read about these everyday success stories in the media; it appears to me that only boom, doom or gloom stories sell newspapers when the local economy is discussed.
