Yesterday I attended a forum on UK housing and commercial property. Apart from the useful information on legal service, survey and interior design, some economic thoughts may be worth sharing (some is my “brainstorm” idea, though):
- While people have recognized the lack of finance (lending to developers and household) is weighing on the housing market, when it comes to forecast on capital value change, it is difficult to explicitly incorporate in the model the risk of deleveraging in the banks and household sector. To be fair, the issue might be partially addressed in the forecast of other economic variables (eg GDP, employment, income) which are affected by deleverage. However, given the property market is significantly affected by money supply and balance sheet leverage, I am very keen to see how this issue is properly addressed in forecasting.
- Property agents have comprehensive data on buyer composition region by region and it shows a high degree of herding in international buyer groups – eg 80% buyers in the Canary Wharf area are Chinese. While herding may provide certain benefits like community support, it is astonishing to see the high level of concentration, which is apparently a sign of information asymmetry between (international) property buyers and domestic developers/sellers. As it is quite easy for property agents to compute, eg ratio of number of international buyers to domestic buyers, it would be interesting to see its relation with property value region by region. I suspect, the higher the ratio, which might be a proxy of information asymmetry, the higher the risk for the properties being overvalued. (And of course, agents would not use “overvalued” on any of the areas they cover – “high value” is their geek word.)
- While it is assumed that property offers returns between bond and equity as its risk is between the two assets, the history tells us it is not necessary so. While 70s has seen property’s 10-year rolling return outperform both equity and bond (as the latter were quite dull in that period), 80s saw a significant reversal with property underperform. The period of great moderation since early 90s even made property investment return lagging behind that of government bond due to continued yield tightening. Start from here where yield is already at historical low level, who knows which assets which outperform in the next decade? Two things should be certain, a) low rental yield is not a good starting point of property investment and b) herding in developers which leads to over supply has a significant knock-down effect on rents which are otherwise quite stable.