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High property prices is never a good sign, regardless of country.

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It is not a good sign if property prices keep moving up much faster than the salary increments we receive every year. Of course if we get a promotion, the typical increments may be 15-20 percent and this is faster than the typical increment in property prices. However, not everyone gets a promotion every year. So, what should happen is that the market gets injection of more affordable homes to keep it stable and availability in affordable units. The image shows the property price increase for over 20 years on average. What happens when the property prices rise well beyond the reach of the majority; everyone who needs a home could NOT buy a home? Property bubble starts happening as soon as many could not afford to buy due to crazy price increases. Property bubble bursts when majority gave up buying and the banks dare not lend. Let’s look to an example in the world’s largest economy for some ideas.

Here’s the article in Financial Times for reference. Some highlights in the article? US Mortgage loans are now back at the same level as 2008. Remember what happened in 2008?  “Housing is often found at the heart of financial crises.” “the housing bubble was the “essential proximate cause of the crisis.” When the 2008 mortgage hit, house prices dropped 35 percent in the U.S. The article says that currently, the situation is pretty encouraging. There are lots of well paid jobs in big cities, the mortgage borrowing costs is low and the current housing supply is the one pushing up prices to record levels. it also shared that based on UBS’s Global Real Estate Bubble Index, there are two markets with higher possibilities of a property bubble bursting; Hong Kong and London. The article highlights the fact that the market is extremely complex because the market is also propped up by many direct and indirect government measures which is not easy to remove. In conclusion, the new Federal Reserve chairman, Jay Powell has a difficult task ahead in normalising the markets back into a free market.

Referring to this sentence, “Housing is often found in the heart of financial crises.”  I think this is very true! Imagine if we need a home but not a single one is affordable to us. We would not be able to buy or we would overstretch our actual limits just to buy. Where a small change in our earnings would push us into a deficit immediately. Assuming the banks still lend to us, it meant that they are taking a super huge risk. Imagine if prices comes down by 10 percent. The banks would immediately spin into losses even if they were to auction off the property! Yeah, that’s how financial crises actually started. Extremely expensive homes which stretched everyone including the banks to their limits. A sudden change toppled everyone to take a huge ‘cut.’ Hopefully we do not face this yeah. At least hopefully it does not start from within. We cannot control the external environment. Happy following.

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written on 16 March 2018

Next suggested article:  Cities with potential property bubble bursting?

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