Real estate has emerged as a lucrative investment option for investors, almost globally with the demand for property going up adding hyperinflation in asset prices. In fact, owners of real estate have achieved abnormal profits in a short span of time.
Housing prices were fuelled worldwide not only by the reckless prosperity of the late'90s but also by the caution that followed. Collapse of stock prices in 2000, unstable situation in the Middle East, growing poverty (two billion people living below the income of $1 per day], terrorists' adventurism and slumping bonds prices in 2002...all this accelerated the flow of money into real estate.
Families financially ruined by markets sought houses not only as a place to live but also as a way to invest-even to shield the nest egg from the risks of terror attacks. With construction industry on the rise again, investors started pondering over the property market as an alternative source for investment with higher rates of return.
The question is: how safe is the real estate investment in these uncertain times? If we analyze this investment from a macro level perspective, it bolsters the notion of investors that it's a safe bet.
Value of land or property appreciates with the passage of time. With unstable currencies, wishy-washy stock markets, falling bond prices, lower return on pension and fixed income market, investors have little choice by playing it safe.
They enter real estate/property/housing market. In general, investors value the piece of land by pouring the funds into property market. However, the impact on consumer psychology is critical because it affects the world's most successful economies.
There is no global property bubble, because real estate is not a true international market in the same sense as stocks or currencies. Cash can move in instant- dollars to euros to rupees to yen- but not a condominium from Singapore to France.
Many countries restrict foreign ownership of property, and there are all usual closing hurdles from financing to down payment to insurance coverage, property valuation to mortgage agreement to taxes.
What unites the many potential bubbles worldwide whether its in Asia, Europe, Gulf or Australia, is the high demand for property-in the most dynamic cities of the growing economies. In short, the ones that are now sustaining global growth and moving the global economy out of recession.
The following are some of the regions where rapid increases in property values have given rise to the belief that land is an important and better investment alternative than equity or bond market:
USA 10%; UK 15%; Australia 30%; Netherlands 27%; UAE 40%; France 33%; Norway 23%; India 19%.
(Sources: World Bank-Reports 2003-04; IMF Reports 2003; SBP Reports Q2-04; The Asian Development Bank 2004; Goldman Sachs ReportsQ2-2004)
The housing boom will expect some correction in short time in some of the region as soon as the economic, political and social conditions improve in these countries. In the United Sates, 27 to 36 per cent correction was made in the last month.
Other countries can expect the same in the coming few months when the interest rates go up in order to curb inflation and bring the global economy out of wood. Property prices in China, Britain, UAE, Hong Kong and other countries are also rising with improved economic growth.
With low interest rates and access to cheap money being easy, investors made the timely move in investing their money in property. Central banks in Australia and Britain anticipated the move by a few months and others in Europe and Asia followed suit.
In Pakistan, the central bank has encouraged commercial banks to come out with innovative products on housing in order to meet the growing demand of this sector of the economy. Banks are providing mortgage/house loans with limit upto Rs10 million. Consumers can get loans depending upon the requirement.
Banks are offering loans after carefully analyzing the genuineness and authenticity of customers. It is estimated that construction and housing sector in Pakistan would touch Rs17 billion in the year 2004-2005. This would largely contribute to the development of the economy and would provide employment to the masses.
Property prices in Pakistan have also received the global impact. The prices after adjusting with core inflation have gone up by 30 to 35 per cent. The construction industry have also benefited from this boom in the housing market.
However, with equity culture in vogue in Pakistan and more and more investors entering into stock market, property market will receive some correction sooner rather than later.
Analyst and investors already expect the SBP to push the interest rates in the upward direction in order to control inflationary pressure in the economy. Historically property prices plummet as rates increase.
Asset price inflation is not a new phenomenon in the current scenario. It existed even in the days of the Hly Prophet (pbuh) in 617 when people used to purchase property and commodities as investments.
There are countries where real estate has shown remarkable growth of 43 per cent. This includes Dubai where construction and housing sectors expect an investment of $31 billion.
With rising oil prices and antipathy of American and western world for the Arabs, funds are flushing out of European and American countries to the Arab origin giving robust touch to the economy.
After 9/11 it is estimated that $500 billion have left the American economy and have been absorbed in the Arab economies. However, there are other national economies where housing and property booms have not taken firm roots.
The most unstable property bubble is in Australia, where properties are overvalued by 27 to 29 per cent. World's stagnant nations can only wish they were attractive enough to inflate housing bubble.
German homes sell for less than they did for decades ago. Japan is recovering from a long period of stagnation and deflation, housing prices continued to fall at all time low. No matter how low interest rates are, cheap money can't fuel a bubble in a prosperous economy.
Housing and property have come out as a new source of investment opportunity. Speculators have also jumped in this new investment game plan whereby they can manipulate the prices easily in their favour. Unlike currencies markets, where speculators can play havoc with the economies of the nations, this one is less threatening.
China has so far been booming alround. With GDP growth at 8 per cent, foreign reserves standing at $450 billion, foreign direct investment close to $75 billion, China is set to become the world's largest economy within a span of 10 years.
The housing and property prices are skyrocketing. Rural migration to urban areas is creating problem for the urban developers to cope with rising population. The other is the supply-side excess. Inexperienced developers borrowing heavily to build spaces nobody want. In China, lot of people have made, gained and lost money at the same time.
Property and housing industry/sector have become an opportunity for investors to ponder upon to make higher rate of return. They are signs that real estate might be peaking high and it may burst very soon. Real estate has provided a source to investors to think: am I missing out on my real estate?. The answer can be given only after reviewing stock markets globally.
