Real Estate’s Tsunami

At the turn of the century the Y2K hoax was all the rage. Warnings of computers crashing, financial sector meltdowns, and global chaos occurred weekly. Amidst all this any forecast of the pending property boom was ignored.

Soon after 2000, property prices began to gather momentum and the growth in property values around the world increased at rates that were unheard of in modern times. As demand for property increased, so property became less available. This did not mean that there were no homes, rather that there were more purchasers than homes on the market – creating a scarcity, and with it a strong sellers market.

The banks played up to this, after all they are in the business of lending money, and made loans more readily available for home financing. The mortgage and real estate industries flourished, and people became real estate ‘investors’ over night. Every instrument available (e.g. interest only loans) for raising funds was being utilised and taken advantage of to purchase property.

So what went wrong? Investors (the real ones!) were not buying! Why not?

The reasons for the collapse of the US banks are numerous, and not for this article. The result of this collapse on the real estate and mortgage industries, was that there was no longer any money available to lend. The effect of this on the property market was that the steady stream of willing buyers dried up and over a very short period of time the markets became flooded with an over supply of sellers – creating a strong buyers market, only this time with willing buyers unable to raise loans. This is the market in which investors (the real ones!) thrive and are now buying.

The US markets have been the most severely effected. Consider the homes in Orlando Florida now selling for $25 000 to $60 000, some of which in 2005 (when property growth was at its peak) were bought at prices of between $200 000 and $250 000.

South Africa has been lucky in many respects. Our banking laws prevented our financial sector from getting to involved in the US mortgage bonds, which saved us from the fall out; and the acts that were introduced over the past 10 years also prevented the banks from irresponsible lending.

These acts included the Financial Intelligence Act to curb and prevent money laundering and such (Part of SA’s return to the global markets), and then the National Credit Act (NCA). Also our Mortgage Origination industry developed and matured in this period.

The benefits of home ownership are plentiful and should not be ignored. Home ownership, through intelligent purchasing and good management of Home Loans, is still the average persons best access to personal wealth.