Jan 22

A Reality check on Realty

James Goldsmith was asked what he thought about his daughter Jemima’s marriage to Imran Khan, the Pakistani cricketer. “He will be a good first husband”, he answered straight faced. Well, he was certainly correct that it would not last, but whether Hugh Grant would have met with the, now deceased, mogul’s approval, we will never know!

What I do know, however, is that a line I heard from him many years ago still rings true as a bell today. Jimmy was asked what he thought of a particular hot and popular new investment trend, his reply says it all: “If you can spot a trend, you’ve missed it!”

Back in the 1980s, the UK emerged from an economic slump, fueled by the policies of the “Iron Lady” you know her, Mark Thatcher’s mummy. The stock market roared and the property market took off at rather an obscene pace. We all know what happened: hairdressers, housewives and hairless youths became overnight experts in either equities or property speculation. The world, everyone claimed, had changed forever; we had experienced a paradigm shift! Well, not quite. The market crashed and people had to deal with the new concept of “negative equity” on their homes for another ten years.

So why am I even discussing this? It’s quite simple, really, to use yet another line: “To know and not to act is not to know”.

OK, let’s take a step back for a second. You see, property is simply an asset class, and every asset class has its day. Today it’s equities, tomorrow bonds, the next day property and even simple old-fashioned cash gets a look in occasionally. So brace yourself now, because you may not read this in the dailies or weekend press, possibly because some would not make it to print if it were not for the advertising and advertorial support the property industry has now grown to represent.

My position and proposition is simple: the residential property rush is over!

Like with all “adjustments”, there are exceptions and to use an equity term, “dead cat bounces”, fundamentally it is a done and dusted deal. I knew it, but I never acted, more fool me. I saw everyone becoming “Property Developers” and I am sure I once got a decent fringe cut and trim from one I met, or had seen others in earlier lives as Internet Investment Specialists. I had people telling me it is a sure bet for another five years, and I watched people actually being nice to estate agents, but did I act? No! So where am I now?

Obviously, you don’t have to take me too seriously; I have never been the world’s greatest property guru. To me, the house you bought was your home and where I come from, no one ever discussed what you paid for it or what it was worth it was where you lived and where you belonged. These days, you meet someone on a train or having a pint and within five minutes they will be telling you their net worth and their last three property deals.

To be honest, I’m glad it’s over. I like it when everyone is not doing the same thing and when they go back to doing real jobs, having varied lives and living in their homes!

On a more serious note, however, we may now need to be cautious about the excessive over-promotion of property as a safe haven for money. Only last year, we were fed stories of overnight queues: these were people apparently just trying to invest in a certain development, but the fact that this was allegedly nothing more than a publicity stunt, is even scarier!

While we can be grateful that higher property prices have released new monies into the economy, we must be aware that much of that is from people increasing their debt on the property they own. All that is very well, in a safe and stable interest rate environment, and let’s face it, the low cost of borrowing has helped fuel both the growth in values and the borrowing. Yet, there are many factors at play in the world today: terrorism and the rapid expansion of China are but two reasons why we are dealing with the oil price. A high oil price will impact materially on inflation and the almost certain relevant increase in interest rates.

Circumstances change quickly these days and it is not too difficult to imagine higher interest rates, falling property values and an overall increase in living expenses. These factors alone could see banks forcing properties onto the market, so that the banks’ customers do not fall into a negative equity position, which would again see properties falling even further.

In the short to medium term, as an investment vehicle, residential property has run its course, but in SA the commercial and industrial sectors still have some value to add, especially if accessed via a quality listed fund. There is still demand out there and the overhang of vacant property has fallen.

Internationally, Germany looks to offer better value than the UK, as the German economic position brightens and the UK slows down. But be careful: the conservative gains you make on such an investment are subject to wipe out, if the exchange rate trend moves against you and your client!

So is this is a death knell for residential property? Of course not, but it is a Reality Check on Realty! The conservative wisdom is that you start making money on your “home” around five years after you bought it. After all, you paid duties, commissions, moving costs and nearly always did some improvement. We will need to be a little more patient and live in our homes, as opposed to trading them!

Like all things in life, nothing lasts forever, just like Australian sporting invincibility. The key is moderation and a broad investment position. That is what the professional brokers can offer clients, and the vast majority do just that.

Good luck with your asset class allocation and remember, “If you can spot a trend you’ve probably missed it, but if you spot the back of a train, you’ve definitely missed it”.

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