Foros de la Plataforma por una Vivienda Digna

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SOFT ISN'T SAFE

Homebuyers can lose money even if house prices do not fall

THERE have been a lot of moves up and down The Economist's global house-price league in the past couple of years. In 2003 Australia and Britain topped the table with 12-month rises of around 20%. But prices there have since levelled off and in the past year have broadly kept pace with inflation (see table). Hong Kong has also tumbled down the league: after a 30% jump in 2004, prices have risen by only 5.8% in the past 12 months and since last summer have even fallen. In the past year house-price inflation has also fallen by more than half in South Africa and China, and slowed from 17% to 13% in Spain. The new high flyer is Denmark, where prices are 17.7% higher than a year ago, followed closely by New Zealand (16.8%).

America's boom also remains strong, with prices up by 13% in the year to the fourth quarter. But there are signs that the market is cooling. Sales of existing homes fell for a fifth month in January, to the lowest for nearly two years, Stocks of unsold homes rose to 5.3 months' supply (from 3.7 a year ago), the most since 1998.



Ian Morris, an economist with HSBC bank, calculates that about half of America's housing market is experiencing a bubble, with prices overvalued by almost 40% even after taking account of low interest rates. Homes in California and Washington, DC, are overvalued by 50%.

That house prices in Britain and Australia have flattened rather than slumped has encouraged most commentators to expect a soft landing in America too. However, that could still mean a hard bump for the economy and for many homeowners.


As British property prices have levelled off, the annual growth rate of retail sales has plunged from 7% to 1%. Mr Morris calculates that even a perfect soft landing in America, with flat house prices across the country, could cause home sales to drop by 30-40%. In turn, mortgage equity withdrawal, which has been financing much consumer spending, would then dry up, creating a drag on growth equivalent to more than 3% of GDP.

British homeowners may comfort themselves that, contrary to The Economist's predictions, prices have not fallen. With homes still remarkably dear, prices could yet fall. Next worst, they could stagnate for a long time. And even then, housing investors could lose because transaction costs such as estate agents' and solicitors' fees and stamp duty are so high.

Suppose you bought a flat in London for £500,000 ($870,000) and sold it five years later for the same amount. You might think you've got your money back; in fact, you have lost a tidy sum. Suppose that you put down a deposit of £50,000 and took out an interest-only mortgage. Stamp duty, legal fees and other costs on the purchase were almost £20,000; five years' maintenance cost £10,000. Your selling costs were then, say, £15,000. Of your £50,000 deposit, you now have £5,000—a 90% loss. Had you simply put the cash in the bank, you would have made 20%.

Worse, because rental yields are so low, you have paid more in interest over the five years than you would have done in rent. In most other countries, where transaction costs are typically twice as large as in Britain, the loss could be bigger still. Investors be warned: even if prices do not fall, housing is not, so to speak, as safe as houses.

http://www.economist.com/finance/displayStory.cfm?story_id=5587046