Is now the time to buy residential real estate?

Posted on 03 March 2009 with no comments from readers

Several friends in Dubai are buying homes in the UK now, while some others are planning home buying holidays to California this summer. Then Dubai based Gowealthy Capital has just launched three funds worth $325 million to buy UAE property both completed and off-plan.

Are they all jumping in too early, or is this the time to buy property around the world before inflation sends prices higher? It is certainly notable that a few, possibly shrewd bargain hunters are out shopping again.

Cheaper property

At that level this initiative makes sense. Prices are definitely a lot more attractive than during the recent boom when far more buyers were scrambling to pay ever higher prices.

However, in real estate it almost always makes sense to wait for prices to stop falling, as prices generally then stay at a depressed level for several years. Property is not like the stock market. It takes time for this market to pick itself up off the floor, and for buyers and lenders to really get their nerve back after a crash.

That gives would-be property owners plenty of time to get their act together, and perhaps a far bigger danger is being stung by a further fall in prices. For are these really early buyers or people who were very late buying into the last boom?

Boom mentality

If they are the second type of buyer then they are in danger of buying in a slump with a boom mentality. That is to say they are still happy to leverage themselves up to the hilt in the expectations of quick gains.

Beware mortgage offers that look cheap now could also look cheaper later. Beware attractive rental rates that could slide sharply leaving mortgage repayments uncovered. But most of all beware a further fall in prices.

Leverage works in reverse on falling prices. It is then your equity that is hit first while the debt remains fixed, and will remain fixed even if the property’s value drops below the debt. People forgot this in the boom, and early buyers might be falling in the same debt trap.

Slowdown

So why the rush? There is no stampede to buy. There is no upward pressure on prices to worry about, quite the reverse as prices are still falling.

That is it really: prices are still falling. Why try to catch a falling knife? It might be different for institutional funds like Dubai’s Gowealthy that can accumulate funds now and invest sometime later. But for individuals it is most likely still too early to purchase global real estate.

You might argue that you have some specific local knowledge that makes a special case for investment but at least think long and hard before you complete what may be one of the largest deals of your life, and not necessarily the best.