September 8, 2005

What is happening to the OECD property market and what are the implications

I just thought it would be good to get down on paper all of the ideas that may affect the property markets in Northern Europe over the coming years, as these obviously have implications for the Spanish second home market.

What we are currently facing in most OECD countries

+ Excessive Debt and the cult of the Consumer + Very high House prices, and how they distort our Economy, + Savings has been Replaced by Reliance on House Price Inflation + Peak oil, and the coming shortage/price rise of Resources + Media Spin, and how vested interests have encouraged excess + Wealth shift, the struggle to regain balance through strikes, taxes & voting

Likely coping strategies

+ Investing Cash: Beating the bank rate: Conservatively & Aggressively + Coping with much higher Oil prices (thnx, to Kam) + Repaying Debt: And dealing with excess borrowings + Keeping Families together in times of stress + Politics & National issues, voting for what matters

Previous economic lessons

+ The example of Japan: 15 years on + Lessons of our Grandparents: the 1930's

The implications after the correction

+ The Global Leveling: Rise of China & India: Decline of the West + Job losses, and coping with Unemployment + The Need to downsize government + The new frugality, and the rise of eco-consciousness + Seizing opportunities, and regaining confidence + Dealing with anger and hardship from those who were unprepared

Future impacts to the housing markets

+ Old Age, what to do when pensions and houseprices fail us. + Demographics: the implications for Property prices and tax rates + Jobs: The skills needed in the New Global economy

In Being Prepared
A good example of being prepared is those who Sold-to-Rent in 2004, when the market was still bouyant, and it was far easier to sell than it is now. Buyers are picky and inclined to insist on big discounts, while last year they were confident and willing to pay up. This illustrates that if you wait for the trend change to become evident and CERTAIN, you may be waiting too long, and miss the ideal timing.

There are some important differences between NASDAQ and the housing market that will effect the way this plays out.

You can't easily short-sell housing. Smart money can leave but bears can't push it down.

Selling houses has higher transaction costs and lead times. You can't really day-trade them. So you won't get a crash.

Data on the housing market is slower and less reliable. Also, because houses are all different, averages are less meaningful. So you won't spot the top until much later.

People need houses - they have a real cost and a real value, unlike a loss making .com. So there is a floor under prices somewhere.

housing is a better hedge against inflation than stocks. In fact, inflation will pay off your mortgage so if/when CPI rises, housing will look better.

housing demand is related to population which is growing - but look at migration: which cities are growing, where are the baby-boomers going?

for housing prices the demand side price is determined by wages and finance costs.

tax law has a big effect on housing - interest deductability, land taxes, tax on profits etc so a change in regulation can make a big difference too.

So while I agree that housing is overpriced, and there is an overhang of vacant property built for speculators, it won't pop in the same way as a stock market. It's more likely to deflate gradually or plateau for years (except in the super-heated markets) and wait for inflation of wages to improve affordability. And this has probably already started.

It will not take may more 0.25% rate rises to take the heat out of the market and when that happens, the flow through will slow the economy and the fed will ease off the brakes because housing affordability is much more policitally sensitive than stock prices.

Category: The Great Housing Debate

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