Fri Mar 14, 2008 9:34 am (PDT)
In my near 3 decades in Stock markets, I have seen many busts come, each getting replaced by an even bigger one.
The Harshad fix of 1992 repeated in 1994, the tech bust of 2000 that continues till date and much before these two were the drought linked bust-ups of Rajiv Gandhi's tumultous 5 years as PM.
The latest, fuelled by foreign and God knows which source of money is the Indian Real Estate bust. Just think, a 300-500 sq feet shop now sells for roughly Rs 1 crore and over in the Malls of Ludhiana, the same may sell for over Rs 3 to 5 crore in Bombay.
What returns would you need to sustain an investment of such magnitude for so small an office space? What type of business could have margins that would justify investment into Reality this expensive and which are the guys who are forking out money to buy them?
On the flip side, what kind of a Rental Income is this outrageously valued asset earning? About 1 per cent per annum, this type of asset was earning roughly 8 per cent three years ago, 6 per cent two years ago and now virtually nothing.
At the cost of sounding trite I think HDFC chairman Deepak Parekh has got Wool in his head or he is demented. Here is one guy who talks down Real Estate everywhere he goes, but his company keeps funding Real Estate. So either everyone at HDFC is equally lost or this nation has seriously run out of shrinks..anyway.
In 2008 your financial world is going to change... dramatically
For a decade it's been so simple for property investors. All they've had to do is buy property, and then sit back and watch it soar in value.
It's been so easy to make money that people have started treating their houses as a bank and a pension, as well as somewhere to live.
They've taken out loans against their homes on the basis they'll make a big profit in the future. They've bought houses they can't afford on the basis - again - that they'll make a big profit in the future. They've planned their retirement around property on the basis that - you've guessed it - they'll make a big profit in the future.
And every time that someone predicts a property crash, and nothing happens, those same people have become more and more convinced they're doing the right thing.
But they're making the most expensive mistake of their lives.
No bubble lasts forever. That's a FACT. There is a mountain of evidence that the property market is in a sick, sick state. FACT.
A property slump is coming....And, crucially, it's going to start very soon...
2008 Investment death-trap
#1: Buying property
According to the housing bulls, panicky estate agents and other crash deniers, house prices won't slump in 2008 because:
a] the supply of property can't cope with demand and...
b] the economic fundamentals are still strong
We don't agree. It's perfectly possible to have falling house prices even if GDP growth is respectable and employment is strong - as the American property market is proving right now.
And if supply and demand really was the crucial factor, rents would have gone up at the same rate as house prices. They haven't. In fact, house prices are now overvalued compared to rents by at least 50%.
No, the real reason why house prices have boomed is that interest rates have been low and lenders have been excessively lax. And that has allowed people to pay prices they really can't afford.
Now the gravy days are over. Interest rates rose 4 times in 2007 alone. And lenders, spooked by the
The result? The housing market is left without the two crutches - low interest rates and easy credit - that were keeping it upright. Right now, it's teetering alarmingly. Eventually it has to collapse. And when it does, it could have a long way to fall...
"The extent of house price over-valuation may be considerably larger in some national markets in
House prices are set to fall. Almost every objective observer says so. But by how much?
Last October the International Monetary Fund warned that homes were overpriced by up to 40%.
That's far more than the overpricing in the
Ed Stansfield, of Capital Economics, forecasts an overall decline in prices in 2008 of 3%. Henry Pryor, CEO of property website PrimeMove.com predicts a fall of 15% this year. Economist and MoneyWeek contributor James Ferguson thinks prices will go down by 3-5% in 2008, and by 41% in the longer term.
We're predicting a fall of 20% in real terms over the next 3 years.
So what should you do?
Well, if you already own a house, you're happy there and you're comfortable with your mortgage debt, don't do anything. You can think about selling at the top and investing elsewhere but why not just relax and enjoy your home.
But if you're thinking about getting onto the ladder, or of upsizing, then I'd urge you to think again.
Just look at the figures...
The average price of a detached house in the
Plus you'll be paying higher and higher mortgage fees to cover the original cost.
We believe the solution is obvious. If you absolutely must buy a house to live in, then make sure you have a decent deposit and a sensible mortgage. And that means no interest-only mortgages, no 'lie-to-buy' deals, no sharing with friends and definitely no 50 year life sentences.
But if you don't really need to buy, why not rent? You'll save money in the short term. You'll protect yourself from the spectre of negative equity. And you'll be perfectly placed to grab a bargain when house prices come crashing down.
You'll also have more money to invest in alternative, lucrative sectors.
I'll introduce you to MoneyWeek's 3 favourite investments for 2008 later. But first let's move on to the next investment death-trap.. .
2008 Investment death-trap
#2: Buy-to-let
At the start of a raging bull market, buy-to-let seems close to the perfect investment. You buy a property, tenants queue up to pay the mortgage for you and then, when you decide to sell, you bank a massive capital gain.
But when interest rates are rising, rental yields are plunging and house prices are all set for a long downturn, it's a sure-fire way to lose money.
According to the industry hype, buy-to-let landlords rake in 8.5% each year from their tenants. In the real world the gross rental yield is more like 5.5%.
After fees, maintenance and other costs that figure slumps further, to 3.5% (and we haven't even mentioned stamp duty and other buying costs yet).
With interest rates just below 6%, many buy-to-let landlords are already swallowing big losses. And the fallout from the credit crisis means it's going to get worse and worse.
Why the credit crunch is set to wipe out Buy-to-Let
Many people think that mortgages are priced off the Bank of England's base rate. In fact they're normally priced off the rate at which banks can borrow from each other. And since the Northern Rock crisis, when the banks became more reluctant to lend to each other, that rate has shot up.
And this is the crucial bit. Interest rates for buy-to-letters and subprime buyers, which started off higher anyway, have risen particularly quickly. In September 2007, for example, two buy-to-let lenders, Advantage and Edeus, increased their average rates by 0.75% and 0.65%.
In the circumstances it's no surprise that people are starting to jump off the buy-to-let bandwagon. The number of buy-to-let investors selling their property leapt by 27% in the first quarter of 2007.
By December 2007, the proportion of landlords choosing to sell up at the end of the lease had jumped to 6.5%. I'd urge you to steer clear of this dead investment too. It could easily cost you £20,000 in the next 3 years.
And if you already own a second property I'd urge you to sell it soon.
This is why...
"Revealed: the 231 year-old 'secret' of perfect property market timing"
You probably won't have heard of the economist Fred Harrison.
But that's all set to change. After analysing 231 years of business cycle statistics,
I'm not going to get into the complex details of it here. But basically
As an economy grows, so does the demand for land. Because the supply of land is fixed, it becomes more expensive. As prices go up, corporate profits and wages are squeezed. Finally there comes a point when prices simply can't go any higher because people can't afford to pay them any more.
And this is the really interesting bit. In every single case the cycle lasts the same time - 18 years, which consists of 14 years of stable or rising prices and 4 years of recession.
The last
Which means that the value of your property investments could start to plummet right now in 2008.
There are a huge number of scary stats and facts that scream that a crisis is on the way. Here are just a few...
The average house is now worth an extraordinary 9 times average earnings. The long-term average is just 3.5!
Last month (January 2008) the Royal Institution of Chartered Surveyors (RICS) announced that December 2007 was the worst month for the housing market since the aftermath of
In 1993 first-time buyers made up 55% of the market. That figure has now slumped to 29%.
According to the Empty Homes Agency, there are 850,000 empty properties in
Individual insolvencies are up 225% in the last 2 years as a nation of debt junkies struggles to cope.
In May 2007 Jon Hunt, founder of Foxtons, sold the
For the first time ever, personal debt is higher than the entire value of the economy. GDP is forecast to hit £1.33 trillion for 2007 - less than the £1.35trn which was outstanding on mortgages, credit cards and personal loans in June. [5]
A study from ABN-AMRO found the
In December 2007
One million debt-ridden householders are using credit cards to pay their mortgage or rent.
Here's what we think will happen.
Investors will do the maths on buy-to-let and then rush to sell up.
People who've overstretched themselves won't be able to meet the higher mortgage payments. They'll either lose their homes or have to sell up.
People will scramble to sell their property. For sale signs will dominate streets. Repossessions will rocket.
And first-time buyers, the traditional lifeblood of the market, won't be around to take up the slack. Instead they'll wait and see if prices go lower.
But as panic hits the markets, and unprepared investors scramble to save themselves from devastating losses, a wave of profit opportunities will open up.
Traps like this...
2008 Investment death-trap
#3: Commercial Property
The era of easy credit and low interest rates didn't just spark the housing bubble, it also fuelled a spectacular boom in the commercial property sector.
Prices for shops and offices went through the roof. Overall the retail sector achieved a whopping 60.5% gain in the three years to 2007 alone.
But now the boom is officially over. The price of commercial property has been pushed so high that the average yield (the amount of rent paid compared with the purchase price) now stands at just 4.5%, well below the
Investors can now get a better return from buying risk-free government bonds than they can get from investing in the increasingly volatile retail sector.
Commercial property funds, including the market-leading schemes run by New Star and Norwich Union, have all seen their values dive in the last 12 months.
Between December 2007 and January 2008 alone 3 of Britain’s biggest property funds – Friends Provident, Scottish Equitable and ScottishWidows – were forced to shut their doors to withdrawals by small investors after an outbreak of panic selling.
Other fund managers, including Schroders and UBS, have already put a block on withdrawals by institutional clients.
The
Economics consultancy Capital Economics predicts that commercial property prices will fall by 18% in real terms by 2010.
In the circumstances our advice is simple. If you're thinking of sinking money into commercial property schemes, please don't.
The idea of swallowing substantial losses in the short-term in the hope of cashing in sometime in the unknown and distant future doesn't make a lot of sense to us.
'Cut your losses and run your profits' is the general advice given to investors in shares. We see no reason why you shouldn't do exactly the same for asset classes, particularly commercial property.
If you've already sunk money into a 'lame duck' retail scheme our advice is to get it out if you can - even if there are exit charges to pay.
And don't get back into commercial property till there are clear signs that the market is bottoming out.
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