This may come as a surprise, but there have been some property markets in the world that MoneyWeek is actually bullish on.
We’ve been long-term fans of German property, for example. And we turned firmly bullish on US property back in April 2012.
Clearly there’s a big difference between various states, but since then prices have gone up by around 25% nationwide.
Now Deutsche Bank reckons that another surge could be coming for US property. Are they right? Or is it time to look at cashing in on any gains you’ve made?
How US housing went from boom to bust
From the 1950s to the late 1990s, US house prices roughly kept pace with inflation. After all, America is not a densely populated country and there are much fewer constraints on supply than in the UK, for example. This led to plenty of suburban sprawl, but also kept housing reasonably affordable.
However, from around 2000, prices began to take off. The Federal Reserve’s efforts to shield the economy from the collapsing tech bubble by slashing interest rates helped to fuel a property bubble instead.
Banks got creative with mortgages. They loaned large sums to people with low or no incomes, and then sold the loans on to yield-starved investors – the notorious ‘subprime loans’. With more money being thrown at houses, prices went up.
And of course, people then came to believe that property prices would never fall. The house could always be ‘flipped’ for more than it cost. So neither borrower nor lender fretted about how the loans would be repaid.
As a result, from 1999 to 2006, the average US house price doubled (a gain of around two-thirds, if you account for inflation).
Then the party ended. One too many dodgy loans had been dished out. Repackaged loans started to go bad, poisoning the complacent financial system. The US housing market was hit by a wave of foreclosures (repossessions).
Prices ended up sliding by more than 33%, after inflation. And it took until 2012 for them to hit rock bottom.
Since then, prices have risen by about 25%. And US property-related stocks have been strong performers.
So what changed? Why did the market rebound?
Many people did end up losing their homes. But the wave of foreclosures that was supposed to swamp the market turned out to be smaller than predicted. That was partly because many loans turned out to have such shoddy paperwork that the contracts couldn’t be enforced. And quantitative easing and low interest rates also kept the mortgage market working, keeping many people in their homes.
Meanwhile, construction collapsed. This cut the number of new homes coming onto the market. And finally, investors piled in. Banks bought up cheap homes as an investment. Private foreign investors jumped in too. Last year, Chinese investors alone poured an estimated $22bn into the US property market.
Can the recovery continue?
Deutsche Bank now argues that a combination of demographics – young people moving out of the family home – and more normal levels of supply could push prices higher, according to Business Insider.
But we’re not so sure. If anything, it looks to us like many of the factors that have fuelled the recovery are on the way out.
For a start, QE is over. The Fed may yet have to put off raising interest rates, but for now, a rise is still on the cards this year. That’s going to make mortgage loans more expensive.
Meanwhile, the strengthening dollar will deter foreign investment, particularly from those whose home countries are slowing – like China for example. Estate agents are already reporting a drop in the number of foreign investors. Banks are also scaling back their exposure to the US market and locking in gains.
At the same time, the house builders have increased production. So any supply constraints aren’t likely to exist for much longer.
Now, you might look at prices and disagree. US prices are still about 10% below their 2006 peaks, and 25% lower when you take inflation in account. That would suggest that the rally still has some way to go.
But this isn’t Britain we’re talking about – the home of perhaps the nuttiest developed housing market on the planet. As I noted earlier, US house prices have very much kept pace with inflation over the long run, and done very little else.
So the 2006 bubble is so extreme that you can’t consider it a good reference point. If you instead compare current prices with the average price over the past 30 years, adjusted for inflation, then today’s prices look roughly 10% overvalued.
That’s not bubble territory by any means – we’re not going to see another devastating housing crash in the US again any time soon – but it’s hardly very attractive either.
And when you combine this with the expense of the overall US market, it’s fair to say that US property – and the related stocks – just doesn’t look that attractive any more.
If you’re interested in investing in countries with cheap-looking property markets, then both Germany and Japan remain among the best bets. But various indicators (such as rents relative to prices) suggest that the peripheral European countries might be worth a look too.
We’ll be exploring this in more detail in an upcoming issue of MoneyWeek magazine. If you’re not already a subscriber, get your first four issues free when you sign up here.
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