US and Canada

The US housing market continues to weaken in the aftermath of sub prime and the banking crisis.
US home prices dropped 5% y-o-y to October 2007, to an average of US$207,800, based on sales recorded by the National Association of Realtors (NAR) (or 8.46% in real terms). These figures may be interpreted as moderate when the comparable 2008 figures become available.

The Office of the Federal Housing Enterprise Oversight (OFHEO), which produces an arguably more widely-based index, saw prices rising 1.8% to end Q3 2007 from a year earlier, which translates to a fall of 0.6% when adjusted for inflation. 10 states in the OFHEO index experienced price falls, including Michigan (3.7%), California (3.6%), Nevada (2.4%), Massachusetts (2.3%), Rhode Island (2.2% and Florida (2.1%). Only two states registered house price growth of more than 10% y-o-y to end Q3 2007, Utah (12.9%) and Wyoming (11.8%). Over 2008 the geographical range and depth of price falls is set to rise dramatically.

Canada’s housing markets are also showing signs of slowing. The new housing price index rose 6.1% to end-Oct 2007 from a year earlier (3.7% in real terms), lower than the 11.4% (10.3% in real terms) y-o-y price rise to Oct 2006. The prognosis for 2008 is not set to improve.

Europe

Buying housing in much of Europe for short term gain should be avoided in 2008, because housing has been relatively highly valued, having seen a long period of price appreciation. In the UK average prices have recently fallen by around 10% year on year and continue to fall, with no respite foreseeable until late 2009 at best. The Baltics have been rising for a long time as a result of strong economic growth, but rental yields have fallen strongly.

Some areas of Eastern Europe are still good value, however. Just because Eastern European housing markets have been booming for a long time, does not necessarily mean that the boom is over. How long the situation holds however is debatable.

In Bulgaria, Sofia has attractive yields despite the absurd over-hyping of areas such as the ski resorts. In Romania, Bucharest is still attractive, with good yields. In Slovakia, Bratislava remains attractive and undervalued, as are other areas of the country. Budapest’s housing market is recovering, being sustained by low price-rent ratios. Hungary’s current economic woes may, however, slow this process. Turkey, Greece, Cyprus and other coastal areas in Southern Europe are still undervalued, but the current financial uncertainty advises some caution.

Middle East and Africa

The UAE remains a relatively stable haven amidst the current financial chaos. Investors should consider Dubai because of the concept of growth. Focus has now been moved to creating dedicated commercial areas for specific industries encouraging the overseas business to set up within the Emirate. As Commercial property investment becomes the substance, Residential will naturally follow. The Government announced the budget for New Projects for 2008 as AED 11.4 billion, a 30.9% increase on 2007’s budget. The 2009 budget is set to be greater still. Abu Dhabi has announced a vast programme of projects this year and the Northern Emirates; especially Ajman, Ras Al Khaimah and Umm Al Quwain still represent great value even despite recent exchange fluctuations. The other Gulf countries such as Bahrain, Qatar and Oman could also eventually produce good returns.

Egypt can be seen to have potential, especially in Cairo, where prices are low by regional standards, gross rental yields are high, taxes are low, and transaction costs are reasonable.

In Jordan, despite strong price rises pushed by Iraqi refugees and Gulf money, rental yields in Amman are still good, with a low tax regime GDP growth has been quite good at 4% a year over the past 5 years, however this may slow down.

South Africa is rapidly cooling, after more than five years of double digit house price increases. The housing market is likely to be dampened further by political uncertainty associated with the 2009 election, given the pro-redistribution rhetoric of front-runner Jacob Zuma.
 

Asia-Pacific

Property prices in much of Asia are still undervalued compared to pre-Asian crisis levels, despite strong increases in 2007. The full effects of the financial crisis remain to be seen.

China is unfortunately not open to investment, and non-resident foreign buyers of dwellings are no longer welcome (though developers still are). While Beijing’s property prices will probably peak in 2008 after the Olympics, Shanghai is still preparing for the World Expo in 2010. With yields at 8% Shanghai’s prices have nowhere to go but up, unless the government intensifies its intervention. Some slowdown may occur after recent figures released showed economic growth slowing.

Cambodia could be a proxy for China. Strongly tied to the Chinese economy, Cambodia is open, has high yields, relatively low transaction costs and low taxes, though investors must be prepared for only an indirect acquisition of land due to constitutional limitations on foreign purchases.

The resolution of Thailand’s political crisis in early 2008 should have opened opportunities after two dismal years; however recent unrest may well have postponed these. Gross rental yields are good at 7%-8%, income taxes are relatively high but acceptable (compared to the Philippines), and the market is pro-landlord. Under better management and stabler conditions Thailand could do very well. Indonesia is attractive, but has problems as an investment destination - there are high yields in Jakarta, but very high transaction costs and high rental income taxes. The Philippines too has high yields, but similarly discouragingly high transaction costs and high rental income taxes.

Japan’s housing market recovered strongly in 2007. While Tokyo’s gross rental yields were unattractive at around 4.7%, the price momentum was positive, the law strongly pro-landlord, there are low-ish transaction costs, and low rental income tax. The recently announced tighter regulation of new dwellings could have facilitated faster appreciation where it not for the ongoing financial situation.

In Singapore gross rental yields may now be too low, at 2% to 3%. Nevertheless, Singapore was (until recently) attracting (and admitting) more foreign-born workers, which was positive for prices. Hong Kong’s yields are somewhat higher (around 3% to 5%), and the US$ peg will mean Hong Kong will follow lower US$ interest rates, which should add a boost to the housing market in normal circumstances

In Australia house prices have stabalised; with recently reported falls in some areas, such as rural New South Wales. No drastic changes in immigration policy are expected, and new schemes to assist low income categories will likely increase housing demand, however this may be largely in the rental sector. In New Zealand we expect the market pause to continue, with no current mitigating economic circumstances.

Latin America and Carribean

Much of the Caribbean is highly priced and likely to be affected by the slowdown in leading US sectors, such as the banking industry.

Gross rental yields in the Bahamas are quite good, at around 5.5% to 7%. The law is pro-landlord. There are no taxes. Square metre prices are reasonable by Caribbean standards, at around US$4,000 per sq. m2. The downside is very high transaction costs, consisting of stamp duty and estate agents’ fees.

Argentina (Buenos Aires) still has excellent yields, and the economy was growing strongly – recent events may put this into check e.g. the nationalisation of the pension funds. Uruguay (piggy-backs on Argentina, as usual), and Colombia, may well be recovering politically and will soon be more attractive to US buyers. Countries in the ‘second home’ diasporas of the US may well remain attractive, as they are significantly less expensive than the Caribbean.

Source:
With acknowledgements to: Smith & Ken Real Estate: www.smithandken.com