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Few people who have bought property in the last three years have made a return on their investment that was high enough to justify the risk that they undertook. This has decreased the popularity of buying property as an investment and it has especially hurt the off-plan purchases of still to be built units.
Most of us know that people tend to move in herds, and they all intend to invest in the same assets at the same time. We also know that superior returns on investment can only be realised if you are willing to go against the general trend. That is why the best moment to start investing in property was before 2003 at which time the stockmarket leveled out and became attractive again. Lately we have seen commodity prices, especially gold, making a spectacular and unexpected come-back.
If you look at off-plan investment options in todays markets than you can see that availability is high, the quality specifications are increasingly superior and the building promotors are giving various interesting incentives. Nonetheless, people are for the moment not returning; on the other hand I see some wealthy professional investors, who I haven’t seen buying since 2003, now visiting these projects. What are they seeing that most of us are missing?
Let’s have a look at the fundamentals: Property prices have stagnated for the last two years. People may be asking more, but they are not selling (any notary’s office seems to be less chaotic these days). Rather, the low interest rate (still negative if you take in consideration inflation) allows most of them to hang in there in an attempt to ride out the storm. Some, on the other hand, have overstretched themselves and their ARM’s (Adjustable Rate Mortgages) are increasingly start to hurt them. In the meantime, inflation has been creeping up; officially it stands at approx. 2-3%, but that is excluding price changes in housing, gasoline, luxury products and even food. Logically, a lot of recent debate is centered around the accurateness of these numbers. To some, real inflation can best be measured by the growth in Money Supply, which currently stands at approx. 8-9%.
What we are really seeing in the economy is a strong resurgence of inflation and property prices which are stagnating. When Interest Rates on a mortgage go up from e.g. 3,15% to 4,25%, the interest repayments on their mortgage surge by 30% (!!) meaning that they have less money to spend on other items. On the other hand, people wanting to take out a new mortgage find that they can borrow less money for the same monthly repayment. On top of that, inflation is making the cost of living more expensive. Existing home-owners have to tighten their belts and new ones are likely to postpone the purchase of their new Home/Vacation Home.
If you believe, like I do, that inflation is approx. 16% for the last two years combined, then houses have become a lot cheaper in real terms. Historically, hard assets such as Real Estate and Commodities have been the best protection against inflation. In my opinion, it won’t take long before property prices start rising fast again and it will be the perfect way to protect your hard earned money against the devastating effects of the inflationary period ahead of us.
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