Saturday, September 24, 2005

Real Estate is Yesterday's Asset Class

This article is slanted towards the concerns of readers in oil producing nations, but it is a nice summary nonetheless -- real estate is yesterday's asset class. (Not here in Marin of course; we're special after all.) The article also ties in with the previous entertaining thread concerning what is the proper measure of the "value" of a property.

Some choice quotes:
"In the mid-1970s a global real estate bubble burst under the pressure of high oil prices and rising interest rates. Are we about to see the same thing happen again in the oil consuming nations?"

"This is not an original thesis. 'The Economist' magazine has been banging on for the best part of a year about the extent of overvaluation in global real estate markets."

"Lest we forget, global rental yields on property have fallen to record lows on the back of a long period of low interest rates. For yields to recover to normal levels either rents have to surge or property prices must fall. Given the pressures on consumer spending right now, an adjustment through real estate prices looks far more likely."

"Global real estate in the past few years has acquired all the characteristics of a classic investment bubble. For a start everyone has done well, even the dimmest investor is showing a profit; and any person that you meet will tell you that you can not loose on property, especially those with zero expertise. This is surely the classic sign of an investment boom at the top of the cycle: universal optimism."

"What people forget is that the very forces that have driven property prices to levels way beyond that justified by rental yield - which is the only true measure of value in property - also work in reverse. You get an upward spiral in property prices, and a downward spiral in property prices."

"The UK property scene, for example, is in a state of denial. The fact is, pure and simple if you want to sell a property today you will need to knock 15-20% off your imagined peak price. Otherwise, you will not get a single buyer - and indeed that is why many would be sellers report waiting months without a single enquiry."

"From the perspective of 'The Economist' it is obvious that a long period of abnormally low interest rates has gradually puffed up a house price bubble of historic proportions. Indeed, this almost certainly is the biggest investment bubble in history."

"The rational investor in oil consumer countries would sell, if possible."

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