While many are concerned about the relative lacklustre performance of the worldwide real estate market over the last few months, there is a growing consensus that a slowdown in property price rises is actually healthy. This may not seem a sensible comment to those fully invested and looking to take a profit but the fact remains that property markets such as those in Australia, the UK, the US and other parts of the world have perhaps run a little too far ahead of themselves in the short term. What is the reasoning behind a perceived “healthy” slowdown in property prices?
Blowing the froth from the market
If you could blow the froth from property markets around the world you would create an enormous cloud. The fact remains that whether or not fundamentals back the recent rise in prices in some property markets, the extremely low cost of finance is feeding this frenzy. When you bear in mind that central banks around the world reduced the cost of finance to help recover from the worldwide economic crisis which began in 2008, what dangers do long-term low finance costs bring?
Storing up problems for the future?
Whether we like it or not there is no doubt that some parties investing in the worldwide property market today can only do so because of relatively low interest rates. People will argue for and against low interest rates but the fact remains that when rates eventually rise many people will be under significant pressure.
Quote from PropertyForum.com: “Could we see a worldwide property market sell-off?”
It is all right for politicians and the property experts talking up markets, advising on attractive investments but as and when interest rates begin to move higher (which might actually be further away than many of us think) the effect could be devastating. We need to be realistic, we need to look at certain scenarios and we need to look a little further ahead than many property investors are today. Why don’t you try a little test at home, increase the cost of your mortgage/property loan by one percentage point per annum and see what impact this has upon your finances.
Politics, politics and more politics
As we have mentioned time and time again, the property market has been used on numerous occasions by politicians to curry favour with voters and to put money in the pockets of the general public. Maybe the politicians forget that we know the reason behind the 2008 worldwide economic downturn and assume that we are looking forward with blinkers on. In simple terms, the U.S.-led worldwide economic downturn occurred simply because the US public took on properties and debt which they could ill afford to finance. We saw a massive increase in volume through the sub-prime mortgage market and just prior to the crash there was evidence of an impending financial crisis.
At the time the politicians seemed to ignore concerns about the short to medium-term outlook and look what we got, perhaps the worst economic crisis the world has seen since the great depression.
So, in conclusion, to take some of the wind out of the sails of the worldwide property market is not a bad thing in the short to medium term. It may dampen the aspirations of speculators, it may make people think again and hopefully, as and when wages begin to rise, the affordability factor stopping so many people climbing aboard the property ladder may begin to reduce. We can only hope!