Looking for property bargains? Don’t turn to the US
How US housing went from boom to bust
From the 1950s to the late 1990s, US house prices roughly kept pace with inflation. After all, America is not a densely populated country and there are much fewer constraints on supply than in the UK, for example. This led to plenty of suburban sprawl, but also kept housing reasonably affordable.
However, from around 2000, prices began to take off. The Federal Reserve’s efforts to shield the economy from the collapsing tech bubble by slashing interest rates helped to fuel a property bubble instead.
Banks got creative with mortgages. They loaned large sums to people with low or no incomes, and then sold the loans on to yield-starved investors – the notorious ‘subprime loans’. With more money being thrown at houses, prices went up.
And of course, people then came to believe that property prices would never fall. The house could always be ‘flipped’ for more than it cost. So neither borrower nor lender fretted about how the loans would be repaid.
As a result, from 1999 to 2006, the average US house price doubled (a gain of around two-thirds, if you account for inflation).
Then the party ended. One too many dodgy loans had been dished out. Repackaged loans started to go bad, poisoning the complacent financial system. The US housing market was hit by a wave of foreclosures (repossessions).
Prices ended up sliding by more than 33%, after inflation. And it took until 2012 for them to hit rock bottom.
Since then, prices have risen by about 25%. And US property-related stocks have been strong performers.
So what changed? Why did the market rebound?
Many people did end up losing their homes. But the wave of foreclosures that was supposed to swamp the market turned out to be smaller than predicted. That was partly because many loans turned out to have such shoddy paperwork that the contracts couldn’t be enforced. And quantitative easing and low interest rates also kept the mortgage market working, keeping many people in their homes.
Meanwhile, construction collapsed. This cut the number of new homes coming onto the market. And finally, investors piled in. Banks bought up property bargains as an investment. Private foreign investors jumped in too. Last year, Chinese investors alone poured an estimated $22bn into the US property market.
Every property bubble has a statistic that brings home how crazy things are.
For example, at the height of the Japanese property bubble in the 1980s, the land around the emperor’s palace in Tokyo was said to be worth more than the entire state of California.
Now we’ve seen the British equivalent. The value of London property is now higher than Brazil’s GDP, according to research by estate agents Savills.
The big questions now are – what will make the property bubble burst? And how far will prices fall?
Foreign money has kept the London property bubble inflated – but now it’s leaving.
If you’ve been watching the recent BBC shows about the super-rich, you’ll know that one of the big factors driving up London property prices has been foreign investment.
Up to 70% of the property sold in central London in the last few years has gone to non-UK residents. For London as a whole, the figure is around 20%. By far the biggest group of buyers is the Russians. They account for one in every five property sales worth £10m or more.
You can see the appeal. As well as the shopping, museums and schools, you have a very generous tax system for those who aren’t British citizens. The reliable rule of law and political stability is another big draw. If you were a Russian oligarch, would you rather keep your money at Putin’s mercy in Moscow? Or squirrel it away in London?
And it’s not just Russian buyers who are drawn by these benefits. The rolling eurozone crisis has sent a lot of money Britain’s way. You can bet that the ‘Arab Spring’ had a similar effect on funds from the Middle East.
As a result, lots of the wealth generated by $100 a barrel oil has gone into London property.
Falling property values and soaring costs are forcing expats home – where some face fresh difficulties.
Like thousands of other British expatriates, Bob Puddicombe and his wife, Phyllis, found that their retirement dreams of a place in the sun turned into a nightmare following the financial crash.
After 13 years living in the south of Spain, the couple returned home in 2012. Their three-bed spanish villa in Almayate, near Malaga, was initially on the market for €250,000 (£206,000). It eventually sold for just €87,000 (£71,500). They have moved back to the Plymouth area, where they lived before moving to Spain.
Mr Puddicombe, who is nearing 70, said they decided to return to the UK as they were getting older and wanted the security of the NHS. But at the same time the adverse exchange rate has hammered the value of their pension in recent years.
“At least we were able to sell spanish villa, and have used the proceeds to buy an ex-council house back in Britain,” he said.
But many of the friends the Puddicombes left behind have not been so fortunate.