Wednesday, September 24, 2008

The Global Property Bust

Most of the focus in relation to the popping of the real estate bubble is centered on the U.S., but the U.S. is far from the only country in the world experiencing a property bust. Global Property Guide recently published a list of housing price changes across the world for quarter two of this year, and a vast majority of these countries experienced a fall. The U.S. had one of the worst price drops, with a drop of 18.93 percent; if you think that is bad, compare it to Latvia, which saw a fall of 33.08 percent. Overall, 21 of the 33 markets tracked saw a drop last quarter, but those numbers are likely underestimating the problem, according to the report.

Not only are some of the official statistics understating the problem, but these numbers don’t take into account the severe drop in transaction volume that is occurring in some places. For example, the country which saw the biggest gain in quarter two was China, yet the report states that “transaction volumes [in China] have fallen sharply, suggesting that buyers are now nervous.” Falling transaction volume is a precursor to falling property prices, so it looks like things are going to be getting worse even in the best of markets.

One thing to note, which really isn’t discussed in the report, is the relationship between mortgage availability and property prices. Markets which saw high leverage use, such as the U.S., are more vulnerable to severe price drops. This is especially true if extremely high-risk or subprime loans were used. Markets which stuck with traditional lending practices likely won’t experience as severe a drop, and likely did not see as high a price climb, either.

A lot of the run-up in prices in these emerging markets was caused by speculation, and while lending wasn’t really a huge concern in these markets, you need to pay attention to end use. If there is no immediate use for the property, it is likely that you are going to see the value drop now that investors aren’t willing to throw money around on a whim. Speculative investors are the ones being hurt the most right now; you can bet that they are going to be in need of cash soon, if they aren’t already, and willing to drop prices substantially. When buying property in an emerging market, pay attention to who the buyers are. If investors are buying from investors, that is not a good sign. At some point an actual end user needs to be the one buying, or else it is unsustainable.

Smart investors are going to remember this pattern--and it is a pattern rather than a new phenomemon--next time around. The boom and bust cycle will be back in the future--you can bet on that--so next time make sure you are prepared and watching for the signs.

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