Real Estate - Business issues
The phrase “safe as houses” has acquired a heavy tinge of irony in recent years.
As the catalyst for a global financial crisis, the collapse of the US sub prime property market in 2007/8 initiated a series of events spreading far beyond the front doors of a few homes across America.
It was, of course, completely expected.
As early as July 2002, Republican Congressman Ron Paul had called for the removal of US Federal subsidies from the Federal National Mortgage Association (Fannie), the Federal Home Loan Mortgage Corporation (Freddie), and the National Home Loan Bank Board (HLBB) claiming: “Like all artificially-created bubbles, the boom in housing prices cannot last forever. When housing prices fall, homeowners will experience difficulty as their equity is wiped out. Furthermore, the holders of the mortgage debt will also have a loss. These losses will be greater than they would have otherwise been had government policy not actively encouraged over-investment in housing.” 1
Similarly, in the UK in June 2005, The Economist posed a simple question: “Soaring house prices have given a huge boost to the world economy. What happens when they drop? ”
It noted: “The whole world economy is at risk. The IMF has warned that, just as the upswing in house prices has been a global phenomenon, so any downturn is likely to be synchronised, and thus the effects of it will be shared widely.” 2
It also provided an insight into the interconnections which would so quickly escalate a credit crunch into a financial crisis: “Two-fifths of all American jobs created since 2001 have been in housing-related sectors such as construction, real-estate lending and broking. If house prices actually fall, this boost will turn into a substantial drag.” 2
For the real estate industry, this meant that the downturn moved rapidly into commercial markets too as companies contracted and demand for office, retail, and factory space dried up.
Today, at least three factors mean that the aftershocks of these events continue to be felt:
Credit: ongoing financial problems in America and Europe alike mean that credit remains tight as banks remain wary of lending to one another. Whilst there may be investor capital looking for a home – some of which may find its way to real estate portfolios – the easy credit regimes of pre-crash days now seem a world away.
Customers: for many people, owning their own home now seems neither attainable nor attractive. With high unemployment, rising inflation and falling incomes even for many in work, a consumer-led real estate boom shows no sign of materialising any time soon. At the other end of the market, many sellers will be reluctant to accept what they perceive as a downgraded valuation on their properties unless it is forced on them by a change in personal circumstances. Given the choice, they will sit on their assets. With neither buyers nor sellers in abundance, the result is clear. To take England as one example, the National Housing Federation is predicting home ownership will slump to just 63.8 per cent over the next decade - the lowest level since the mid-1980s.
Confidence: As recently as August 2011, the US Consumer Confidence Index dropped to 44.6 – its lowest level for more than two years and a drop of nearly 15 points on the previous month. In this and similar markets, such a climate does little to encourage taking on long term commitments like a home loan. 5
Real estate enterprises will need to be innovative in conditions like these, adding value and inspiring confidence for fearful consumers and cautious commercial buyers.
Customer focus and a willingness to adapt have rarely been more important.
