Invest some thought into property buying
THE end of February saw the Dow close at a new 52 week and five-year high (less than 100 points from a new all-time high) even in the face of onrushing sequestration. Sequestration is a term used to describe the practice of using mandatory spending cuts in the US federal budget if the cost of running the government exceeds either an arbitrary amount, or the gross revenue it brings during the fiscal year. Simply put, sequestration is the employment of automatic, across-the-board spending cuts in the face of annual budget deficits.
A fiscal farce?
It turns out Wall Street was not afraid of the big bad sequestration. While the market did in fact retreat on the final day of the month, there was little indication of impending doom. Rather, it appeared to be little more than the normal caution that often accompanies approaches to major milestones, such as all-time highs.
Now the conventional wisdom seems to be that cuts that were being called Draconian only a month ago are actually a miniscule percentage of the economy, and will likely do little damage. Some are even arguing that the arbitrary cuts may actually be better than what the US Congress would have negotiated!
Bottom line? The DJIA (Dow Jones Industrial Average) closed February at 14,054.49, up 1.4% for the month.
The US housing recovery is also encouraging from both an economic and investor perspective given its centrality to the global financial crisis. This is a bellwether sector whose impact on US investment and consumption can drive improvements in US and global economic growth, as well as supporting sentiment towards risk assets such as stocks and real estate.
A stronger housing market influences the US economy through three principal channels:
- Residential investment – when the housing sector recovers, more homes get constructed, providing a direct investment boost to the economy.
- Wealth effect on consumption – when house prices go up, consumers feel wealthier, which tends to make them spend more.
- Mortgage equity withdrawal – as was evidence in the boom period, rising house prices enable homeowners to borrow more against the value of their properties.
Since it benefits the broader US economy, the housing recovery is an important supportive factor for many US-related assets, including equities and real estate - this can only be a good thing for the general health of the global economy.
Investing a step further
The biggest investment most people ever make is usually in their own property. The running costs of the roof over your head, plus the expense of paying off the mortgage each month eat up a large part of most people’s earnings. As a result, many people only start serious investment after they’ve paid off their mortgage. In a low inflation environment, it makes sense to get shot of the home loan as quickly as possible. Rising property prices won’t come riding to your rescue as they once did.
You can also go one step further than just buying a property to live in; property as an investment has been a neglected asset in recent years. But with many financial markets still taking on an uncertain air, putting money into what you can see can be a worthwhile, lower-risk route for your savings.
'The next big thing'
Ever thought about buying an investment property in Albania, Bulgaria, or Croatia? Enterprising property developers cite these amongst others as the ‘next big place’. But just because they say that, don’t throw caution to the wind. After all, their job is to promote what they intend to build. Once they have your money? Their job is over.
The difficulty is that while your developer is building, so too are many others. The result? Over supply and under-demand. If you want to know what happens when building gets out of control, take a look at property prices from 2005 – 2010 in former hot spots such as Spain, Florida and yes, you guessed it - Dubai!
This always brings us back to the old adage of location and demand. Central London, central Paris or central Manhattan property is always expensive, because there isn't much of it. In places that have empty fields and not much planning control, you have to take a reality test – look at location, demand and future supply before buying property as an investment. Above all, speak to an expert!
Pic credit: freedigitalphotos.net
DO YOU own property as an investment, or to live in? Do you have any questions about investing in property for Rupert? Leave them in a comment below or tweet us @cashyme!