Has property overtaken gold as the new safe haven?

[Nicholas Wallwork]

Amid news that Manhattan property prices continue to defy gravity and the London market remains relatively strong despite constant criticism there is a growing belief that real estate is taking over from gold as the new safe haven. This rise in property prices, usually instigated by buoyant local economies, seems to be a direct contradiction to the state of worldwide stock market.

Earlier this week we saw a massive sell-off in the Chinese stock market and despite repeated attempts by the government to quell selling by major investors, a further sell-off is expected. This has prompted a negative reaction across the US and Europe with all major stock markets starting 2016 under a cloud. So, why do property prices continue to rise while stock markets remain under pressure?

Safe haven status

Historically gold has been the safe haven and go to asset in times of volatility and troubled markets. However, many investors now seem to be looking towards the property market which is fast becoming the new safe haven. When you also consider the number of Chinese investors shifting funds from their homeland to places such as the London and Manhattan property markets, is this not a sign that property is fast becoming THE go to asset?

Growing demand

The simple fact is that as the worldwide population continues to grow, more countries join the economic recovery and a lack of new house builds across the globe impacts supply, demand is pushing prices higher. It seems that each and every major government around the world has promised an increase in new builds but very few have been able to deliver. When you bear in mind the fact that a significant increase in supply would slowdown future property house price growth, would this necessarily be a vote winner?

Unwanted assets

It is also worth noting that particularly across Europe there are still many banks holding assets which they were forced to reclaim in light of the 2008 economic collapse which saw many of their customers unable to keep up their mortgage payments. What has been significant over the last 12 months is the number of major investment companies picking up these “unwanted assets” at very attractive prices. This in itself has prompted a stabilisation of the European real estate market with some experts predicting an increase in 2016 as the overhang of unwanted property slowly diminishes.

This is of course in direct contrast to the luxury real estate markets of London and Manhattan which have defied gravity for some time now. There was a concern that London property investors were switching their attention to places such as Manhattan, in light of tax changes, but this has not materialised so far.

Conclusion

As the worldwide population continues to grow, property supply continues to lag and demand for real estate increases, investors seem to be turning away from stock markets and gold – is property now THE safe haven asset of the future? Time will tell but there are signs of a significant change in investor attitudes towards property compared to the likes of gold and stock markets. Attractive yields, bank property fire sales and hopes of a general worldwide economic recovery in the medium term seem to be feeding this appetite for real estate. The major concern in the short term is the performance of the Chinese economy and the impact this will have on worldwide economic growth. However, demand for worldwide real estate, especially the luxury markets, is expected to increase yet again during 2016.

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[Le Seb]

Well the nice thing about property is that it gives you Yield where gold... really doesn't.

 

[Michelle Barringer]

I would consider the property market to be the better option - gold prices have fluctuated a lot in recent years and are often unstable - whereas property might have a wobble but always goes up over time and as mentioned above gives you a yield!

 

[Le Seb]

This is a falacy. The fact that in your experience prices always go up does not mean it does. There are countless examples of markets crashing.
It's a matter of economy, demographics and location that will tell if it goes up or down.

 

[Michelle Barringer]

Obviously location does matter but overall, long term property always goes up in value - just looking at prices in England these have risen on average 24% in the last 5 years and 289% in the last 20 years

 

[Le Seb]

Again, this is a falacy. No assets can go up forever when compared to inflation, it is just not possible. There is a name for that, it's called a bubble. The only question is to know when prices have gone too high, and obviously that's hard to know. But maybe, just maybe, tomorrow will be the beginning of a 30 years downwards trend for houses. Properties is an investment, and all investments carry risk, all of them.
Go explain to the Spanish investors of the last decade, or the Japanese investors in the 90s that property always goes up:

"In the late 1980s, on the heels of a three-decade long “Economic Miracle,” Japan experienced its infamous “bubble economy” in which stock and real estate prices soared to stratospheric heights driven by a speculative mania. Japan’s Nikkei stock average hit an all-time high in 1989, only to crash in a spectacular fashion shortly after, causing their real estate bubble to collapse and throwing the country into a severe financial crisis and long period of economic stagnation known as the “Lost Decades.”"

 

[Michelle Barringer]

I agree that everything carries risk - but then so does keeping your money in the bank!! In the UK the government are so focused on Economic growth and the property market is such a large part of this that they will engineer the market to protect from this.

 

[Le Seb]

Clearly, money in the bank is dangerous too - agree.
I wouldn't be so confident about the government protecting the housing market though. They are hell bent on crushing it right now by hiking taxes for landlords in particular.

 

[Michelle Barringer]

I would suggest that the landlord taxes are to slow the growth rate and make the market more accessible to 1st time buyers and therefore prevent a bubble that is unsustainable - so clearly not ideal for investors at the moment - but a move towards protecting the market

 

[Le Seb]

Fresh out of the press... unfortunately I can't paste the link, the forum prevents me, but here is the beginning of an article on Bloomberg. I hope it will help dispel the myth of "Prices always go up", because they just do not, and implying that it does is dangerous, some people will lose their shirts, maybe destroy their life because of such statements, they have to know the risks.
Prices might go up for a period of time for a specific location, and then go down again, and then perhaps go up again. But the fluctuations can be wide just like in the stock market, it is no different. Overall, you would hope to do well with such investment, but just be aware that this is no guarantee.

Edit: I would add that with a market whose prices are so reliant on foreign investors, and with the Renmibi, the Yen, and the Ruble either going down or having already been hit badly, if the pound keeps appreciating the number of buyers will drop even more significantly.

Article:

"The median sale price of a home in SW1, the London postcode that includes Belgravia and St. James’s, fell by more than a fifth in the 12 months through November as rising taxes damped demand.

Sales values and volumes have fallen since Chancellor of the Exchequer George Osborne increased the stamp-duty sales tax. SW1 had the biggest slump in sale prices in London during the period, according to an analysis of preliminary Land Registry data by Bloomberg. The median sale price in the postcode fell to about £928,000 ($1.36 million) in November and the number of homes sold fell almost 75 percent to 15.

Luxury-home values in London and New York will have a sharp downturn this year as Russian and Chinese buyers disappear and low oil prices crimp demand from the Middle East, Blackstone Group LP Vice Chairman Byron Wien predicted. Many expensive condominiums will remain unsold, putting developers under financial stress, he wrote on Monday.

Russians bought 4.2 percent of the homes that were sold in central London’s best districts during the third quarter, down from 10 percent a year earlier, according to Knight Frank LLP. Chinese buyers acquired 11 percent of homes sold there from January to November last year, compared with 10.5 percent in the same period in 2014, the broker said."...

 

[Michelle Barringer]

Of course prices can fluctuate and in local areas and short term prices can go up and down but the long term trend for property is undeniably positive - esp in the UK market.

 

[Le Seb]

This is the UK historical data. If you bought in 1989 and held it for 10 years (A long time) you would have lost money.
What I am trying to impress upon you is that things do not go up in a straight line, and while the UK has done well so far on average in terms of house price appreciation, nothing guarantees it going forward.

Here is an example for all you know:
Inflation shoots up => interest rates go up => pound gets stronger => less international investors invest in the UK, more UK investors invest abroad => the whole housing market in the UK reverses trend for 20 years. It's not that hard to imagine.


So I think saying that things "Always go up" is a sure recipe for underperforming the market and the more this myth spreads, the more people will get hurt. I urge you to use responsible language and warn people of the risks. I myself am a property investor, so it's not like I don't like real-estate, but it is crucial to be aware of the risks.

The smart investor will be aware of the risks, have made calculations and decided if that the risk is acceptable (or not). Then she will invest in consequence. But the one who is not aware of the risks is a fool.

 

[Nicholas Wallwork]

Again, this is a falacy. No assets can go up forever when compared to inflation, it is just not possible. There is a name for that, it's called a bubble.

I think Michelle is talking mainly about UK property as that's what she quoted the figures for. I agree this isn't across the board and depends on location any many other factors.

Assets will ALWAYS go up by at least inflation and property has tended to increase faster than that in the UK (not all countries).

Good investors buy assets, real tangible assets in good locations which will always be in high demand (e.g. the UK is an island with a growing population and demand is ever increasing). Gold is an asset and although it's price fluctuates I believe it will always be a good long term "safe" investment, probably far better than cash which will depreciate over time due to inflation. The hypothetical idea of Cash under the bed is the worst form of investment (not that anyone does it!) as it's actually going down in value due to inflation.

SO to summarise and why I quoted this section of your argument @Le Seb is good assets do always go up in value due to inflation if not more. The bubble might bring asset values back in line with inflationary growth but they will still be going up over time, historically (and highly likely in the future but as you quite rightly say it's not certain as it's the future) more than inflation (in the UK specifically).

 

[Nicholas Wallwork]

I would suggest that the landlord taxes are to slow the growth rate and make the market more accessible to 1st time buyers and therefore prevent a bubble that is unsustainable - so clearly not ideal for investors at the moment - but a move towards protecting the market

The changes will potentially help experienced investors and weed out the not so experienced & "get rich quick" ones (i.e. those who don't run a good business and take expert advice) who can only make money in a rising market. Those who remain and are good will potentially have more deals available and be able to take a slightly lower profit margin as they will have more deals to act on as the mass (in-experienced) buy-to-let market could be put off by these changes. I do not fear them.

 

[Nicholas Wallwork]

here is the beginning of an article on Bloomberg.

This article is just regarding London and in particular one postcode SW1. London is a market in it's own right and is not representative of the whole UK market in the slightest. London relies on foreign investment a lot and you quite rightly pointed out this investment appetite can change depending on the countries economic situation. this is not the case across the rest of the UK.

London is the first to go down and the first to go back up when the markets fluctuate and it's got it's own micro market all together.

 

[Nicholas Wallwork]

This is the UK historical data. If you bought in 1989 and held it for 10 years (A long time) you would have lost money.
What I am trying to impress upon you is that things do not go up in a straight line, and while the UK has done well so far on average in terms of house price appreciation, nothing guarantees it going forward.
...
So I think saying that things "Always go up" is a sure recipe for under performing the market and the more this myth spreads, the more people will get hurt. I urge you to use responsible language and warn people of the risks. I myself am a property investor, so it's not like I don't like real-estate, but it is crucial to be aware of the risks.

The smart investor will be aware of the risks, have made calculations and decided if that the risk is acceptable (or not). Then she will invest in consequence. But the one who is not aware of the risks is a fool.

Yes but take the 10 years before that or indeed after both go up massively. You're quoting buying at the top and selling at the bottom. Which of course some poor people did but it's not a fair sample of data.

I think Michelle is trying to say "It is highly likely and based on the long term historical performance that the UK property market, if you take a long term view (e.g. over 25 years) it is probable that you'll make a solid positive return". That would be my statement anyway (without explicitly stating again all the risks and caveats already mentioned). If you only invest for 10 years then who knows I agree... BUT the longer you can hold 30/40/60 years the more likely you are to ride out the dips and make money long term.

Mortgages and financial products always state "your investment (or relevant product) can go down as well as up" or words to that effect. They are right and so are you...

Property should always be a long term investment for the un-initiated so the risk of a downturn can be leveled out. For the experienced they can afford to take higher risks and do flips, refurbs e.t.c. as they will be hopefully adding value in any market and in fact - adding value then exiting quickly is a nice safe way to operate.

That again is another key to property investing... adding value so you don't rely on the market movements to make you money. Invest for yield and ensure you have a large enough buffer for interest rate rises, then your risk is reduced and any market downturn should be able to be ridden out...

Happy investing and I think we're all in agreement really just be careful to quantify what you say.

 

[Le Seb]

I think Michelle is trying to say "It is highly likely and based on the long term historical performance that the UK property market, if you take a long term view (e.g. over 25 years) it is probable that you'll make a solid positive return".

And if she had I would have agreed
My point is simple: Don't take anything for granted, and certainly don't teach everyone that things never change. UK housing prices have recently been doing well because the economy has done well. But economies work in cycle and maybe one day the UK will hit a tailwind and a long deflation of prices could happen, like it happened to Japan, an even more successful economy on the whole. I am not saying that the assets will fall, but one needs to be aware that they could.

I think ultimately we all agree, I am just picking on the words here, because I know too many people that got hurt during the 2000 stock bubble believing that things always go up.