Is the global property market on the rebound at last? Possibly, says Ross Clark — though it was always more inflated in some places than others
FOR THOSE DELUDED into thinking that property is the one investment which can never go wrong, the city of Detroit has long posed something of a challenge. It is many decades since anyone heard a real estate speculator boasting of making a killing there. The city has become a byword for urban decay, its derelict and burned-out houses providing filmmakers with a vision of life after the Bomb. Even serviceable houses can be picked up for $10,000 in some neighbourhoods.
Among the many suggestions for regeneration in recent years has been a proposal to return districts to agricultural use — reversing the usual process which causes so much distress in the more crowded south-east of England.
It comes as something of a surprise, then, to see Detroit heading the most recent Standard & Poor’s/Case-Shiller index for property prices in the US’s ten largest cities, with prices apparently rising by 6 per cent between May and June. If people want to buy houses in Detroit again, can this possibly signify the beginning of the end for the global property slump?
It isn’t just in Detroit that house prices are rising after years of slump in the US. The Case-Shiller national house price index suggests that across the country prices have risen by 1.2 per cent in the past twelve months. This takes them back to 2003 levels, but still 31 per cent lower than they were at the height of the boom in 2006.
The US experience of the past decade proves that property is like any other commodity market: it is prone to wild swings in sentiment, often driven by prophecies of shortage which turn out to be spurious. Then the bubble collapses and it turns out that there was no genuine shortage at all, just a temporary inability for suppliers to match the demand from overexcited speculators. The suburbs of Detroit, along with ghost villages in Spain and Ireland, are like the grain mountains and wine lakes which are often exposed once a commodity market has collapsed.
WHAT MAKES THE property market so dangerous, however, is that it is the one commodity market ordinary people are apt to play. Amateur investors who wouldn’t know how to buy a boatload of coffee beans even if they were minded to are nevertheless happy to indulge in a bit of property speculation.
Sometimes they make money, of course, but they do have a horrible tendency to pile in and bail out — the latter often with a bank’s boot on their backside — at the wrong time. It wasn’t big investors who drove up US property prices during the boom years, but people who really earned too little to buy a home.
And now it isn’t ordinary folk who are behind the sudden turnaround in bombed-out property markets such as Detroit; it is large investment companies buying repossessed homes by the street-full. The number of foreclosure sales is plummeting as mortgage-lenders dispose of homes through more organised ‘short sales’ before the borrower technically defaults on the loan.
Whether the rebound in the US market is a harbinger of a worldwide recovery in the global market is doubtful. China, where the property market ignored the crisis of 2008-09, is still in the early stage of property deflation as the speculative boom in empty flats begins to unwind. In southern Europe the market will remain blighted by the prospect of currency devaluation in the event of a collapse of the euro for a long time to come.
As for the UK, it will be hard to excite investors into picking up portfolios of properties on the cheap, for the simple reason that UK house prices have never really crashed. After an initial plunge in 2008 they seemed to recover with the arrival of ultra-low interest rates, then started to dribble lower again.
Anyone hoping to pick up houses on the cheap will be disappointed, as a lack of distressed sellers has been a notable feature of the economic crisis — in contrast to the early 1990s, when, although the recession itself was much shallower and shorter, high interest rates led many to abandon the repayments on their homes.
THE SLUMP HAS exposed the very different policies towards housebuilding between developed countries. During the boom years, everywhere boomed together. It didn’t matter whether it was in the likes of the UK, where supply of new housing was tightly restrained by planning laws, or in countries such as Ireland and Spain, where governments were happy to let the bulldozers roll: in each case, cheap and easy credit drove prices upwards.
When the crash came, however, property markets behaved in wildly different ways. Those in Spain and Ireland plunged dramatically, while in Britain prices remained remarkably high.
While relatively few people can afford to buy homes, there is a burgeoning population of renters who — at present, at least — are able to soak up the available supply of housing. Result: stagnation, where there are few sales, low demand but little pressure to sell either. Prices remain high but yields stay low.
THE DIFFERENT BEHAVIOURS of the British and US property markets are a demonstration, too, of how the laws of repossession can have a big effect on a housing slump.
The big difference between Britain and the US is that in the former, homeowners who default on their mortgages can be pursued for losses many years after they hand back the house keys to the bank. In the US, meanwhile, it is much easier to escape mortgage debt. As a result, US buyers have little to lose and little to fear from default on their debts as soon as their home slides into negative equity. British buyers, on the other hand, have every incentive to cling on.
But now that the tide of repossessions appears to be receding, anyone hoping for a significant bounce in the property market is more likely to witness it in the US. Even Detroit might be worth a look. In a collapsed property market you don’t have to bank on the neighbourhood becoming highly desirable. If your $10,000 house becomes a $20,000 house at some point over the next five years, you will have done very nicely.
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