The residential market has been artificially inflated by massive buy to let investors propping up prices due to their intense speculation in recent times. The big question is: what caused the prices to rise so fast? What will happen over the next few years and what are some of the world’s major property players, like Dubai based Emaar Group and American Donald Trump, doing in the current environment?
The European Union has been good for Ireland, but bad for property. Our interest rates were inappropriately low for too many years and this more than anything has contributed to rising prices.I experienced a property slowdown in the UK in the 90’s, but believe it or not, it ended being an overall positive experience. Having purchased property in London just before the price crash, this seemed like a crisis at the time, however in practice it turned out to be not as bad. I rented out my property, waited for the market to pick up, a few years passed in negative equity, but by then I had paid a good part of my mortgage and received increased rental income until prices stabilized, then began to rise again. Property is a long term play and just because the market cools it doesn’t mean we all panic and sell up. Many think the game is over, however, others see the current slowdown as a strategic buying opportunity. To highlight this on the international level, one of the largest house building companies, Emaar Properties, is now buying in one of the world’s most troubled property markets. Emaar are building the biggest tower in Dubai and recently purchased the John Laing Group, the second largest privately held homebuilder in the US. In his recent interview to CNBC News the Chairman of the Emaar Group H.E. Mohamed Bin Ali Alabbar surprisingly indicated that Emaar wished to purchase American house builders at the time when institutional investors were running a mile away from these companies. How come Emaar are buying when the American housing market is falling?
Emaar quite simply are taking the medium to long term view, they believe America has fundamentally strong economy, they understand recessions come and go, in fact America has a recession about every five to six years, just like the property market, and Emaar Group believe the property market will bounce back sooner rather than later. They understand property business now is a sentiment game and sentiment will come back into positive territory again. On the same channel, 22nd of November 2007, Donald Trump stated he had advised people two years ago not to buy property in the USA, surprisingly this was at a time when the market was booming and everyone was a buyer. However now that the market is in trouble, he believes it’s is a good opportunity to buy ”I had done a lot of deals over the past few years, but had not been a buyer of American Real Estate in recent years,” said Mr. Trump. However today, Mr. Trump is a buyer of American property in a market which is clearly in the middle of a major sub-prime crisis. So what does this say about human nature? Only the brave buy in troubled times or is he saying we should buy when others are selling? Think medium to long term? Is this the time to be brave and be a buyer in the property market?
There has been such intense negative publicity recently its not surprising the market has been slower. How much negative press can any industry take? Everyone seems to be thinking only short term. Share prices rise and fall; however it doesn’t stop us buying shares.
The question is what happens next? What should investors who own property do when prices appear to be falling of slowing at least? There is only one option and that’s to hold on, ride the storm out, especially if you’re an investor in an area with good rental income. One side effect of a slower sales market is more people are forced into renting. The Daft National Rent Index was up by approximately 12% in the year to May 2007, with even stronger gains recorded in the core markets for Dublin city
The market fell sharply in London in the 1990’s and many investors were worried about the situation as some were trapped in negative equity, but if you think only short-term this will panic you into being irrational. If you can afford to keep the property especially in an area with increasing rents, hang in there, the market will come right again and this may happen soon after the interest rate cycle turns.
The first signs or a property market recovery will start with the occasional positive media story; the news will move from negative to mixed signals and then on to generally more positive sound bites. This usually comes soon after the interest rate cycle turns downwards. The market is now driven largely by sentiment and once the interest rate cycle turns, positive sentiment will follow soon after. Regardless of the various arguments about the state of the market, our economy is strong and once the interest rate cycle reverses downwards the property market will soon move back into more positive territory. Nobody expects double digit growth, but sooner rather than later we will come back to more sustainable levels of single digit growth.
With a fundamentally strong economy, a low corporate, job creating tax rate and low levels of Government debt, despite some recent increases UK and Irish Governments’ debt levels are the envy of many other major economies. The British and Irish have built a reputation for successful economic management and I don’t believe this will change in the near future.
Henry Davis
