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23/01/06 - Should we start buying again?

A lot of comment has been floating around the news media over the last year about the property market crashing. We need to understand that there are three basic premises that undermine the discussion of a property crash.

- There is no national property market
- The property market doesn't explode or crash
- The market has limited relevancy to the shrewd investor

The property �market" is based on local economies

When people speak of the property market, they are using nationally based statistics. In reality it is based on local, and, in many cases, micro-local economies. What's happening in London does not directly affect what's happening in Lincoln.

True, certain factors such as interest rates affect all the markets, however there really is no broad measure of the entire housing industry in the U.K. Average prices, average new homes sold, and average homes built nationally have little relevance to your market. Even within a particular city that is doing well, there may be certain neighbourhoods doing poorly for a variety of reasons, such as over-building of new homes, lack of previous investment or social depravation.

So while statistics, calculations, and economic factors are relevant, so is common sense: Take a look around and see what's really happening. Talk to estate agents, investors, and lenders in the area for a better picture of what is going on. Beware of nationwide, countywide, or even citywide statistics. Be concerned with the average prices in the particular neighbourhoods in which you buy property, the average time on the market, and the changes in sales prices from last year to this year.

Property markets do not "crash"

We all remember October 19, 1987, known as "Black Monday." The stock market lost 22% of its value in one day--what investors call a "crash."

There have been times when property values have fallen by 22% in certain cities and in pockets within cities. However, no property market dropped 22% in one day, one week, or even one month. In fact, the property market "crash" of the late 1980s took several years to reach its full extent in most areas.

At its core, the housing market, like the stock market, is all about supply and demand; when more people want to buy than sell, prices go up, and vice-versa. However, the stock market is much more whimsical than that of property. People often buy into stocks at the top of the market based on future potential, not inherent value.

True, people are buying some properties at the top of the market hoping it will go even higher, but property still has inherent value because you or someone else can live in it.

If the neighbourhood in which you live goes down 10% in value, are you going to move? Not likely, you'll just be upset about it. The transaction cost and headache involved in moving is not worth it for most people. Contrast the stock market where a zillion investors can sell off in minutes by a click on their computers.

Supply and demand also works differently in the housing market. Right now, demand outstrips supply in some areas of some towns and cities. But, people realise that even if they sell at the top of the market, they will have to buy at the top of the market in order to stay in the same market, so why bother?

This phenomenon is causing limited supply and even HIGHER prices. In other words, the price increases are not necessarily about "irrational" demand, but rather limited supply. The fact about land is: �They ain�t making any more of it�

More people are moving into the U.K. than moving out. Therefore, if our cities have limited space and more influx than out, prices are likely to stay where they are or go up.

Finally, there's the possibility that the traditional economic theories of boom and bust are simply flawed and no longer applicable. In other words, just because things have been going up in the housing market for so long, doesn't necessarily mean they are about to drop.

Economic trends causing the market to remain strong

Immigration. Thousands of immigrants are moving into the U.K. every year. We now have lots more potential home buyers. More demand, means higher prices.

Migration Trends. Lets face it we baby boomers no longer want hard to maintain housing and are moving into different types of accommodation perhaps creating new communities.

Relationship Trends. People are forming relationships later, causing more single people to buy houses and apartments.

Lenders are making loans easier. Interest rates being so low for so long doesn't hurt either. But, it's more than just low interest rates; it's how EASY it is to get a loan.

What about rising interest rates? A lot of people are worrying about how rising interest rates may affect their investments. Certainly, a rapid rise in interest rates may affect prices, since the higher the interest rate, the less property a buyer can afford. But, interest rates alone do not determine prices, supply and demand are much more relevant.

As long as a particular area has more buyers than sellers, the values will remain strong. The Bank of England is well aware of how interest rates will impact the housing market. Interestingly, while the rise in interest rates in the U.K. has "cooled off" the housing market, there has been no collapse as predicted.

Finally, the fact that property values in our city�s have climbed at many times the rate of inflation previously yet now are growing at only twice the rate of inflation doesn't signify a catastrophic reversal.

It is inevitable that "boom" markets do cool down. But, there's no evidence to justify a rapid decline in prices. Most experts agree now that the likely scenario will be a "cooling off" where prices will remain flat, appreciating just above average inflation. (20/20 hindsight?)

Finally, keep in mind that just because our city�s average property values or home sales goes down, doesn't mean it goes down everywhere in the city. The problem is, people see headlines like "Average House Prices Falling" and panic.

Declining values of �1,000,000 homes skew the average, so you can't pay attention to broad numbers. You need to look specifically in the price range and location of property you are buying.

The mass overbuilding of �500,000 homes in many markets won't generally affect the older �150,000 properties that average investors own. Much of the new home building across the country has NOT been of �150,000 units.

The market has limited relevancy to the investor

If you buy and hold for the long term (ten or more years), you aren't likely to lose. Property values have always gone up in the long run, with few exceptions. The same is probably true of the stock market in the long run, but there's one problem: There's no guarantee any company you invest in will be in business in fifteen years--not even Xerox, IBM or AOL!

The views expressed in this article are personal to the authors and are drawn from a number of sources. They are intended to stimulate thought and should not be used as the basis of advice on present or future property purchases.

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