Equity Market Meltdown and Real Estate Investment

[neustria]

Greetings to all,

With thousands now losing money daily in the equity markets, I wonder if anybody can tell me what affect this is likely to have on property prices. I know that in France, the UK, and Spain, the bursting of the DotCom bubble corresponded to an unprecented rise in real estate prices.

To anyone's knowledge is there any causal relationship which can reasonably be established between the equity and real estate markets?

One obvious line of thought would suggest that with prices in the Bourses now in freefall, those with ready cash would be unlikely to venture in that direction, with the result being that a downturn in the equity markets could actually boost property prices by offering a safer and less volatile alternative.

But it also appears obvious that each country will likely have its own specific reaction to the phenomenon, with each having to be considered as a separate entity...

Foremost comes to mind the US, where the decline in house prices has actually CAUSED the current woes in the DOW and the S&P 500. So Wall Street sneezes and the stock markets in London, Paris, Madrid, and Frankfurt all catch a cold. Does this mean that the effect on their respective real estate markets will for all also be identical?

Wouldn't it also be reasonable to imagine that with the mood getting ever darker, those with money to spend might just choose to put it into government debt etc. and wait out the storm, making real estate soft in tandem with the equity markets? Following this idea, the dominating negative sentiment could bring on a wait-and-see attitude for all investments, with the result that property could follow equity into a long downslide.

If anybody here has considered these questions, I would be interested to hear what they have to say.

Neustria

 

[JMBroad]

Foremost comes to mind the US, where the decline in house prices has actually CAUSED the current woes in the DOW and the S&P 500. So Wall Street sneezes and the stock markets in London, Paris, Madrid, and Frankfurt all catch a cold. Does this mean that the effect on their respective real estate markets will for all also be identical?

Decline in house prices in the US meant that people couldn't cover their mortgages which meant that subprime mortgages defaulted which lead to high risk securities showing a negative growth, which lead to panic amongst shareholders who couldn't differentiate high from medium and low risk property securities which lead to the dive of numerous international investment banks and hedge funds who had invested in this market which lead to the stock market concerns and the worry about a recession.

Look at it as a shift in trends. In 2003, US government sponsored Fanny Mae and Freddie Mac represented 76% of mortgages whereas Wall Street represented 24%. In 2007, the ratio was 43% govt sponsored, 57% Wall street.

The fact that property prices are down in some regions may mean that people are more interested in investing in overseas property in locations where the forecasts are more optimistic.

 

[andyk2]

How much does this affect real estate investment?

This is a genuine question, and would be interested to hear (serious) points of view. The basis of a great deal of international property investment over the past decade has been from couples looking for a place in the sun. They dont neccessarily care about falling equity values or sub-prime crises - in fact the people who couldn´t afford a mortgage but got one anyway are the people you don´t really want buying your properties!

As interest rates come down to attempt to divert a full blown recession, that should only encourage the potential first time/holiday purchaser to look into international property investment in greater depth.

Am I totally optimistic or just missing a point?

 

[JMBroad]

This is a genuine question, and would be interested to hear (serious) points of view. The basis of a great deal of international property investment over the past decade has been from couples looking for a place in the sun. They dont neccessarily care about falling equity values or sub-prime crises - in fact the people who couldn´t afford a mortgage but got one anyway are the people you don´t really want buying your properties!

As interest rates come down to attempt to divert a full blown recession, that should only encourage the potential first time/holiday purchaser to look into international property investment in greater depth.

Am I totally optimistic or just missing a point?

That's a question which a lot of people are asking themselves. Time will tell, but my opinion is that some markets (especially ones where the domestic market is continually gaining strength and the middle class is expanding) are still be a safe bet. If those markets also qualify as "a place in the sun" all the better.

Berlin - as we are on the german property forums and not Brazilian - fits the description in another way: Domestic economy seems to be gaining strength, population of Berlin is changing, with the new inhabitants having a higher spending power. Although it's not exactly a "place in the sun" it is a "place in the spotlight" for weekend city breaks - Berlin is a fun city for the young executives intent on partying and a city full of culture and art and business for the rest.

 

[mart123]

Hi Neustria,
In Germany there is not the same stock market culture you have in Anglo Saxon cultures, so I don't think that will drive price changes. A significant portion of savings are held on bank deposit accounts. What may affect prices is the fear of losing employment which appears to be rising at the moment. There has been a spate of bad news in the papers recently altough that's not related to the sub prime crisis - ***** are closing a factory in Bochum with the loss of 2000+ jobs (it's moving to low cost Romania). Woolworth have also announced 900 job losses and Deutsche Telekom have announced more restructuring. 2008 was supposed to be a year with over 2% GDP growth however the government has been revising that down recently. On a plus note
- Taxes will be reduced slightly from Jan
- in 2008 average Salaries are expected to be above inflation for the first time since about 1998 i.e. people will feel they have more money in their pocket.

Finally in discussions with German colleagues and friends who are thinking of buying houses, we're all watching interest rates which already have started to drop.

So I am waiting until May/June before I buy, I hope I can make a more enlightened decision then.

regards,
Martin

 

[neustria]

"Finally in discussions with German colleagues and friends who are thinking of buying houses, we're all watching interest rates which already have started to drop." (Martin)
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Greetings JM and Martin and thank you both for your insight,

Martin, importantly you brought out the question of the interest rate reaction to the present crisis, and this is indeed an essential factor in the property equation. Yet Trichet in his recent position has made it clear that he wants to HOLD interest rates at their present level, which suggests that he places the inflation danger in the Eurozone ahead of the recession danger. I wasn't aware that bank rates were dropping here in Germany (which is how I interpret your above post) but Trichet's present position will likely put a cap on any further rate cuts - unless of course the recession scenario is borne out and he is forced to follow Bernanke's lead and cut rates.

A Eurozone rate-cut scenario would theoretically be doubly supportive of real estate because it would encourage domestic purchases by making mortages cheaper, and would further encourage foreign (non Euro) buyers by strenthening their own currencies against the euro. (As a general rule, high interest rates strengthen currencies, and low rates weaken them.)

If rate cuts do take place and if this brings stronger inflation, then this too should support real estate pricing because the inflation factor generally gets priced into house prices.

Neustria

 

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