What is the growth expectation of property?

Will the property market ever recover?

Can property be considered as a good investment at present?

These are issues that every property investor or prospective investor meditate on at present.

With the present uncertain conditions in the financial markets due to the Standards & Poor’s  rating of the USA, every investor suddenly pays attention as to what the markets are doing.  The financial markets surely have an effect on the property market and its growth pattern. One do, however, have to keep in mind that there are some unique internal factors driving the property market which differs from the factors that are driving the financial markets.

5 Reasons why the value of fixed property will increase.

1)
The first factor is that it is easy to trade in and  out ofstock markets, while fixed property is not that liquid. ..................                  

................ It takes far longer to enter into a property transaction due to, amongst others the equity volume of property transactions, credit applications, transfer documentation preparation, as well as deeds office procedures.  When exiting the market, prospective purchasers are very selective in a slow economical cycle. Banks are more strict in their lending criteria and it all influence the volume of successful sales, the result of which is that it takes quite some time to sell a property.  Often the seller is forced by the slow exit period from the property market to tolerate the reasons which occurred to sell long enough that the property is eventually withdrawn from the market and not sold at all. In a sense, the slow movement of property transactions protects it from rapid movement in prices.

I like to compare the stock market and property market with the aviation example of a helicopter flight and that of a military  freight plane, where the first example represent the stock market and the latter the property market.

A helicopter has the ability to rise vertically from the ground, but when something goes wrong, it has a very limited ability to glide to a safe landing. Usually it falls like a brick from the sky. So is the stock market. It’s graph shows rapid inclines and declines. Opposed to that the freight plane can be compared with property investments. It needs a runway to take off, it takes it’s time to get airborne, if something goes wrong it has the ability to stay longer airborne than the helicopter and boy, when it lands safely it moved a huge load of supplies. (Capital returns) 

2)
Property has the rental market as an internal driver that differs from other investment types. In a slow economy as we experience at present, the rental demand increase. The reason therefore is that, because of the banks that does not have an appetite for risk, they tighten their lending criteria and fewer prospective purchasers qualify for bonds. People have to stay somewhere, so they rent.

Another situation that increases the rental demand is for instance people that are financially over committed in the down turn of the economy, or who lost their monthly source of income. They are forced to sell off their residential property and to revert back to the rental market. The increase in the rental demand has a direct effect on the supply of rental properties, resulting in the normal supply and demand principles to force monthly rent upwards. Increased rent means better return on investment for investors, and it plays a major role as an internal driver for increased property values.

3)
Property developers scale down their activities, some to zero when the markets turn down. Usually developers are caught with stock in process of development in the down turn of the markets and these are sold off at reduced prices without making profits, just to exit from the market. Some developers are even forced into liquidation and lose everything. Developers are sometimes financially so badly hurt, that they either completely leave the business of property development, or they wait for an upturn in the property market before they start to investigate new development opportunities. This has the result that the whole building industry goes into a slump during the slow market periods and very few or no new residential units are built.  The housing demand is still there and the demand has its normal growth pattern, but with few or no new units becoming available. This will contribute to a mushroom effect whereby the continuous and increasing need for housing opposed to an extended period of very low supply of new units, will eventually force prices  to a steep rise again.

4)
The age old inflation animal also plays his role as internal factor to increase the value of property. I always use the example of a building brick that cost the same 20 years ago to manufacture than what it cost today to manufacture. Think about it, a brick is made from clay, labour, burnt with coal and that is it. The value of these elements have not increased. It is the value of money that have decreased. Where do you think the paper money is coming from that the United  States are presently pumping into the economy to salvage their own debt situation?  Correct, from the printing machine. It has the value of used paper, but because it is called a Dollar, it is worth a Dollar, but then what is the value of a Dollar?  When you compare the graph of the growth of the DOW Jones with the graph of the devaluation of the Dollar since 1971, you will notice that there is an almost perfect correlation between the two. From this, I conclude that there was no growth in the value of shares for the past 40 years, but for money that lost its value. Opposed to that, every time there is an emotional reaction in the stock markets, investors flee from paper assets to commodities like gold. Look at the present gold price which is at a record high of around $1700 per ounce. The reason therefore is that gold is a commodity and a tangible asset. Bricks and mortar are also  tangible assets and actually more in demand than gold, though gold is of more value.  ........Makes you think, doesn’t it?

But OK, let’s get to the point. Because of the devaluation of paper money, the cost of renovating or building a residential dwelling is constantly on the increase. Selling existing property below its replacement value is only possible when such bargains are in over-supply. When the supply eventually runs out, replacement value, combined with demand will dictate price. Guess what? It will force property values to increase.

5)
The last internal driver for increased property values I want to touch on are the human emotions and need to individualism. There will always be some of us humans who want to improve our existing residence or change houses because of changing needs. We will always want to improve, upgrade, relocate, make better, change, paint or be the Jones’ instead of living up to them.  All this contribute to inflationary recourses which are being applied to the property increasing its value on the one side, but on the other side it is a source of constant recapitalising of an existing property. When sold, this property contributes to the increasing average of properly values in the neighbourhood, forcing future comparable market analysis statistics upwards.

Question is:

Can property be considered as a good investment at present?

My answer to that:  The market will recover and values will increase.

When do you want to buy? When prices are low, or when prices are high.  

.........................................Answer it for yourself and make your own mind.