Most Cipto Junaedy of the western world, if not the entire first world, seems to be reporting that property market price inflation is decreasing or stalled. In the worst-hit areas we even hear tales of a lowering of house prices and negative equity for some unfortunate new homeowners who jumped on to the property bandwagon at the peak of the recent property boom. High Street inflation never lets up, so it's natural for property investors large and small to feel that the end of the world is nigh.
This state Cipto Junaedy of mind is undoubtedly an over-reaction. The human psyche drives modern man to ensure he has a place he can call home in the shortest possible time after leaving his childhood days behind in the former family house. Fair enough - but does this man of our times actually have to own his home outright, in theory at best? And more tellingly, does this man have a god-given right to expect that with home ownership comes enough lifetime's wealth to be able to retire from working for an income at his chosen time? The latter scenario is a common desire, and it is based upon the premise that property values will always rise faster than other commodities.
We are now Cipto Junaedy finding that we have come to the end of a period where property value inflation was outstripping general living cost rises. But we should not be surprised because we have had these ups and downs before. The general trend though is that property prices commonly rise again fairly rapidly after periods of stagnation. It's all about supply and demand.
The demand for new homes or at least of people looking to move house will never cease. Why? Because many old homes become dilapidated for a start. Then we have the new young families who need their own space and cannot expand into the limited space of parental homes. On top of that, the modern world economy relies upon many workers who must be mobile throughout most of their working lives, thereby prompting housing development and property transactions countrywide and often internationally. And don't forget those that choose to upgrade or downsize by choice due to family or personal needs.
What about the supply side? The builders can't build fast enough in boom times because handsome returns on their property investments are almost guaranteed. If land banks are purchased just prior to a stalling of property prices, then naturally there is no rush to build and sell at reduced profit margins. So any oversupply rate reduces until it balances demand. This is the period being experienced in many parts of the US and Europe at present.
As soon as a local property market detects increased demand, sellers start hiking up prices and builders and developers start building. So the conclusion is "don't panic" and take some time to reflect on why existing homeowners feel uneasy every time this cycle reaches its low point.
Property is a reasonably sound investment, and it gives the buyer the obvious immediate attraction of having somewhere to live (or work in the case of commercial premises). However there are other ways to exist comfortably which don't involve organizing your life around the demands of meeting hefty monthly mortgage repayments and fretting about why the value of your property doesn't always rise at a consistent rate.
Many young people are opting to rent property. The so-called home-owning critics immediately shout that house rent is "dead money". To a degree, yes, but if renting frees up income to invest in markets which don't fluctuate in boom & bust cycles, then isn't the oft-struggling homeowner something of a hypocrite? And who actually owns the majority of private domestic homes anyway? If a homeowner misses a mortgage payment you soon find out that the big financial institutions cold-heartedly treat lenders as no better than tenants of real estate upon which their businesses are founded. And furthermore, as tenants with much less rights than conventional renters of property who have fair and equitable rental agreements to rely upon in times of hardship.
It's interesting to note that in previous generations the majority of house dwellers were tenants, particularly in towns and cities. Most homeowners can probably quote that their parents or grandparents lived in rented accommodation, and that is a reason why they strive to ensure that they and their dependents have the security of home ownership. What security, if you worry about why your investment and lifestyle is not always as good as you dreamed? Our ancestors survived, without the disposable income levels of today, so perhaps the property rental option should not be dismissed so readily.
Maybe the biggest lesson to be learned by property investors when global economy growth recedes is that only a few property types are guaranteed to grow in value (in the longer term) at a rate generally in excess of other inflationary factors. These are the well-maintained properties in desirable locations whether they be urban or rural. Funnily enough, my experience tells me that these properties are likely to fall into the cheaper price category or the other extreme, the high-end luxury home. The middle range property, by its very nature, forms the bulk of property sale listings, so the seller struggles to promote his property above the multitudes of similar priced homes or sites.
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