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Madmaxista
- Desde
- 29 Nov 2004
- Mensajes
- 183
- Reputación
- 4
SOFT ISN'T SAFE
Homebuyers can lose money even if house prices do not fall
THERE have been a lot of moves up and down THE ECONOMIST's global
house-price league in the past couple of years. In 2003 Australia and
Britain topped the table with 12-month rises of around 20%. But prices
there have since levelled off and in the past year have broadly kept
pace with inflation (see table). Hong Kong has also tumbled down the
league: after a 30% jump in 2004, prices have risen by only 5.8% in the
past 12 months and since last summer have even fallen. In the past year
house-price inflation has also fallen by more than half in South Africa
and China, and slowed from 17% to 13% in Spain. The new high flyer is
Denmark, where prices are 17.7% higher than a year ago, amowed
closely by New Zealand (16.8%).
America's boom also remains strong, with prices up by 13% in the year
to the fourth quarter. But there are signs that the market is cooling.
Sales of existing homes fell for a fifth month in January, to the
lowest for nearly two years, Stocks of unsold homes rose to 5.3 months'
supply (from 3.7 a year ago), the most since 1998.
Ian Morris, an economist with HSBC bank, calculates that about half of
America's housing market is experiencing a bubble, with prices
overvalued by almost 40% even after taking account of low interest
rates. Homes in California and Washington, DC, are overvalued by 50%.
That house prices in Britain and Australia have flattened rather than
slumped has encouraged most commentators to expect a soft landing in
America too. However, that could still miccionan a hard bump for the economy
and for many homeowners.
As British property prices have levelled off, the annual growth rate of
retail sales has plunged from 7% to 1%. Mr Morris calculates that even
a perfect soft landing in America, with flat house prices across the
country, could cause home sales to drop by 30-40%. In turn, mortgage
equity withdrawal, which has been financing much consumer spending,
would then dry up, creating a drag on growth equivalent to more than 3%
of GDP.
British homeowners may comfort themselves that, contrary to THE
ECONOMIST's predictions, prices have not fallen. With homes still
remarkably dear, prices could yet fall. Next worst, they could stagnate
for a long time. And even then, housing investors could lose because
transaction costs such as estate agents' and solicitors' fees and stamp
duty are so high.
Suppose you bought a flat in London for GBP500,000 ($870,000) and sold
it five years later for the same amount. You might think you've got
your money back; in fact, you have lost a tidy sum. Suppose that you
put down a deposit of GBP50,000 and took out an interest-only mortgage.
Stamp duty, legal fees and other costs on the purchase were almost
GBP20,000; five years' maintenance cost GBP10,000. Your selling costs
were then, say, GBP15,000. Of your GBP50,000 deposit, you now have
GBP5,000--a 90% loss. Had you simply put the cash in the bank, you
would have made 20%.
Worse, because rental yields are so low, you have paid more in interest
over the five years than you would have done in rent. In most other
countries, where transaction costs are typically twice as large as in
Britain, the loss could be bigger still. Investors be warned: even if
prices do not fall, housing is not, so to speak, as safe as houses.
Homebuyers can lose money even if house prices do not fall
THERE have been a lot of moves up and down THE ECONOMIST's global
house-price league in the past couple of years. In 2003 Australia and
Britain topped the table with 12-month rises of around 20%. But prices
there have since levelled off and in the past year have broadly kept
pace with inflation (see table). Hong Kong has also tumbled down the
league: after a 30% jump in 2004, prices have risen by only 5.8% in the
past 12 months and since last summer have even fallen. In the past year
house-price inflation has also fallen by more than half in South Africa
and China, and slowed from 17% to 13% in Spain. The new high flyer is
Denmark, where prices are 17.7% higher than a year ago, amowed
closely by New Zealand (16.8%).
America's boom also remains strong, with prices up by 13% in the year
to the fourth quarter. But there are signs that the market is cooling.
Sales of existing homes fell for a fifth month in January, to the
lowest for nearly two years, Stocks of unsold homes rose to 5.3 months'
supply (from 3.7 a year ago), the most since 1998.
Ian Morris, an economist with HSBC bank, calculates that about half of
America's housing market is experiencing a bubble, with prices
overvalued by almost 40% even after taking account of low interest
rates. Homes in California and Washington, DC, are overvalued by 50%.
That house prices in Britain and Australia have flattened rather than
slumped has encouraged most commentators to expect a soft landing in
America too. However, that could still miccionan a hard bump for the economy
and for many homeowners.
As British property prices have levelled off, the annual growth rate of
retail sales has plunged from 7% to 1%. Mr Morris calculates that even
a perfect soft landing in America, with flat house prices across the
country, could cause home sales to drop by 30-40%. In turn, mortgage
equity withdrawal, which has been financing much consumer spending,
would then dry up, creating a drag on growth equivalent to more than 3%
of GDP.
British homeowners may comfort themselves that, contrary to THE
ECONOMIST's predictions, prices have not fallen. With homes still
remarkably dear, prices could yet fall. Next worst, they could stagnate
for a long time. And even then, housing investors could lose because
transaction costs such as estate agents' and solicitors' fees and stamp
duty are so high.
Suppose you bought a flat in London for GBP500,000 ($870,000) and sold
it five years later for the same amount. You might think you've got
your money back; in fact, you have lost a tidy sum. Suppose that you
put down a deposit of GBP50,000 and took out an interest-only mortgage.
Stamp duty, legal fees and other costs on the purchase were almost
GBP20,000; five years' maintenance cost GBP10,000. Your selling costs
were then, say, GBP15,000. Of your GBP50,000 deposit, you now have
GBP5,000--a 90% loss. Had you simply put the cash in the bank, you
would have made 20%.
Worse, because rental yields are so low, you have paid more in interest
over the five years than you would have done in rent. In most other
countries, where transaction costs are typically twice as large as in
Britain, the loss could be bigger still. Investors be warned: even if
prices do not fall, housing is not, so to speak, as safe as houses.
