By Charlene Clayton
Now is not a sensible time to invest in international property, David Green, the head of research and investment management at ipac SA, told a recent meeting of the ipac/Personal Finance Investors Club in Johannesburg.
The price of overseas property is extremely and unsustainably high, and the media are warning of a property bubble that is close to bursting. So you should think very carefully about buying, for instance, an apartment in London or into a syndication of properties held overseas, David Green says.
Falling global interest rates have lead to the property bubble, Green says, referring to a survey recently published in The Economist
magazine.
The survey shows that in the past seven years, property prices have shot through the roof, with countries such as Ireland experiencing a 219 percent growth. And in the United States, growth of 51 percent was recorded, which is the highest rate of growth in property prices in recorded history in the US.
To put the current high property prices into perspective, The Economist compared property prices internationally with inflation, rentals and the income of consumers.
The surge in house prices in developed countries - with the exception of Japan - compared with inflation has been dramatic. Since 1975, in Britain, real house prices (that is, after taking inflation into account) have grown by almost 200 percent, real growth in the US was about 140 percent, and in Australia it was about 130 percent.
In Japan, property prices peaked in 1989 and 1990 and have been in decline since, marking a decade of economic stagnation in that country.
Declining inflation and falling interest rates are a deadly cocktail for property investments, Green says.
Low interest rates encourage investment in property and high levels of debt and low inflation adds to the problem. If you have a lot of debt, you want your income to be rising in order to pay off your debt, but when inflation is low, your income grows slowly.
The ratio of house prices to rentals received for houses overseas shows that the rate of growth in house prices far exceeds that of rentals. In the US, average house prices are more than 15 percent above their long-run level relative to average rentals. In Britain, average house prices are almost 40 percent above their long-run level relative to average rentals.
There has also been a dramatic surge in house prices compared with the average family incomes. The average house price is more than 30 percent above its long-run level relative to the average family's income in Britain. In the US, this ratio is 16 percent, and in Australia it is more than 20 percent.
Furthermore, households have taken on a substantial level of debt, with the ratio of household debt to income being 130 percent in Australia and 180 percent in the Netherlands.
These figures show that there is a property bubble, which is under quite a lot of tension, Green says.
But the bubble in property prices is not limited to houses. Office prices have been increasing and rentals have been falling, the survey shows, he says.
The Economist looked at house prices specifically because it affects consumers directly - consumers have more money in their homes than they have invested in stock markets. So, a decline in property prices can affect consumer spending, and hence economic growth much more powerfully than a decline in share prices.
In general, property is an attractive asset class and a good way to diversify your investments. It offers two major benefits: rental returns which may be linked to inflation; and the tendency to perform well when shares and bonds do not. However, at present the price of property internationally is too high, Green says.
Publisher: Personal Finance
Source: Personal Finance
Why now is not the time to buy offshore property.
Posted On Tuesday, 29 July 2003 02:00 Published by eProperty News
Now is not a sensible time to invest in international property, David Green, the head of research and investment management at ipac SA, told a recent meeting of the ipac/Personal Finance Investors Club in Johannesburg.
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