As economies around the world still struggle to recover from the 2007/8 downturn prompted by the collapse of the US sub-prime market how is it that we are still seeing record property prices in some areas of the world? While areas such as London seem to grab the headlines there are many other examples around the world where property prices seem to be within touching distance of their former highs. If the worldwide economies are struggling to gain traction and momentum, how are property prices holding up so well?
First-time buyers dwindling
If you cast your mind back 20 or 30 years ago you would no doubt have been fed the official line that first-time buyers are the new blood of the property market and thereby inessential. While this is most certainly the case, the number of first-time buyers has fallen dramatically in more developed real estate markets as prices push ahead at rates which leave household incomes in their wake. So, it looks as though we can discount first-time buyers as the ultimate supporting tool for the worldwide real estate market?
Investors looking for long-term income
Once we cast aside the first-time buyer market we begin to see the wood for the trees and the fact that investors do in many cases hold the trump card in local and international property markets. When you also bear in mind the rock bottom base rates currently available we can only imagine how attractive a rental yield in excess of 5% would look. These yields are commonly available across many parts of the UK and other developed markets offering a useful income in this low inflation/low savings rate environment.
Rental numbers continue to rise
The ongoing issue for first-time buyers, with many now unable to cover the deposit required let alone support a mortgage application, has exacerbated a problem which emerged many years ago. As more and more people look to find their own property there has been an enormous increase in the number renting their homes. Many are renting because they cannot afford to buy their own property although others are perhaps more mobile in the employment market and unable to put down long-term roots.
If we cast aside the investment market, place first-time buyers on the side-lines, aside from the fact that there are far fewer new properties built each year to fulfil even current demand, it is the rental market which is offering support to the wider property market. As we touched on above, a rental yield in excess of 5% is well above the rate of inflation and well above paltry interest rates currently available. So, even if there were short-term dips in the price of property, buy to let investors looking longer-term would see gross income of 5% as a great help with this pain until markets recover.
If you take a step back and look at the situation from a distance it is not difficult to see that those looking to initially buy property only to be priced out of the market are more than happy to rent in the short to medium term. Many will take this route with the intention of buying property outright only to actually create a self-fulfilling prophecy where rental demand pushes property prices even higher and even more out of the reach of first-time buyers. When you throw international and domestic investors into the mix it is hard to see how this situation will rectify itself in the immediate future.
Are we moving away from the ability of first-time buyers to own their property outright and perhaps moving towards rental/part ownership?