There are two ways to look at real estate in the new era. The first is to look at western europe and the other developed countries of the world. The second is to look at the developing world. Let’s start with the first, and look at the UK.
In my books on property markets I devote a chapter to the history of real estate prices. That is perhaps one of the most important chapters in the book, apart from the chapter on how to value a house properly, and why houses have different values in the first place. The trouble is the world is full of “experts” who dont understand what they are talking about. They look at what has happened to house prices in the UK since the second world war, and they project that scenario forward. What they dont seem to grasp is that the world in the twentyfirst century is not remotely like the world in 1945, or even the world in 1965.
Let me explain how things work. To get a full picture you really do need to buy my book, but hopefully this digest will help.
In 1945 there was a wrecked economy and a wrecked currency in the UK, and indeed, across the whole of Europe. Prices were on the floor. Adjusted for inflation house prices were the same as they were in 1760. What happened next was that over a period of ten years the economy improved, wages went up, and people started doing reasonably well. The prime minister Harold MacMillan was always bleating that “You’ve never had it so good”, and he was right in many respects.
If people have an improving economy, regular increases in wages, and good job prospects they will be able to spend more money, and be able to afford higher house prices, therefore house prices are likely to rise.
From the sixties onwards the banking system expanded enormously. Mortgages, which were very limited, became widespread; lending criteria relaxed; and because of the availability of those mortgages people could spend even more on houses, so prices could rise even more.
During the seventies we had massive inflation, with annual rates above 15%, and even reaching the mid twenties in one year. The value of money dropped through the floor. This artificially increased the nominal cost of houses.
During the nineties even more sophisticated financial features were introduced which made borrowing money almost as easy as printing the stuff, and naturally that made buying houses even easier, so prices naturally went up again.
There comes a point when the system collapses because the euphoria takes things too far, and people are carrying far more debt than they can reasonable repay. Well, that’s just happened. However, the question is: what next?
Nothing goes up and up indefinitely. It just doesn’t happen. If prices rise because of increased wealth, so be it, but they can only rise in tandem with that increased wealth. They cant outpace the increase in wealth.
If financial instruments such as mortgages, synthetic mortgages, and cash-backs, increase the money available, so be it, but that increase can only go so far, which means that house prices can only increase to take account of the increase in cash available. There comes a point when that increase can no longer be sustained. We have reached that point, and things are now going the other way. That means house prices are likely to go down rather than up.
What all this means is that house prices went up not because there is something inherent that makes them go up. It means that house prices go up in tandem with a series of stages in the financial development of a state. It also means that there is a simple historical relationship between the economic wealth of a nation and its house prices. They will naturally rise from a low level to a maximum. They will then fluctuate just below that maximum according to the current economic health of the nation.
Can I put that another way: We’ve hit the maximum. You cant have house prices rise any further in relation to income than they already have in the recent past unless someone changes the rules quite drastically.
The implication here is that the only way anyone is going to make money out of house price appreciation in the future is to buy at the bottom of any big drop. Picking bottoms isn’t easy, and it’s very risky. There are other rules which help you in those situations, but they dont figure in this short article.
Let’s look at the second situation; the developing world.
If you find a country that is economically and financially in the situation the UK was back in the years after the second world war then you can reasonably expect that country will go through a similar cycle. That means you can buy real estate in that country and, over a 20-50 year period, expect the value of property to go up quite significantly.
If you want capital gains in real estate you need to find a country that is just starting to chug forward. You need to find a place where the political leaders can truthfully stand up and say to the populace “you’ve never had it so good”, and start investing. Your investments will grow, maybe erratically, but they will grow big time.
So where do we go from here? We go where the new economies are starting to grow. That’s where the future is. Western Europe is the past as regards big profits from real estate. If you want to go into property because that’s where the profits are, then the first thing you need to do is move your business abroad to the developing world.