Who's Reheating the Market

Sharp fluctuations in real estate prices are not always caused by economic factors alone. In some countries, an upswing artificially creates market "boom" players, with the state itself often among them. Banks may also act in this capacity. By acquiring housing stock and then selling it, they artificially inflate the price threshold.

Igor Indriksons, real estate investment manager and founder of the Indriksons.ru company

They are not speculators, since artificially inflated prices can induce a bubble, which is not to the benefit of the market but only reduces its investment attractiveness. A boom, on the other hand, may be beneficial. In fact it is often the decisive factor in favor of acquisition of real estate by doubting investors. In a boom, prices return to more realistic levels without catastrophic consequences.

In Germany, where housing prices did not rise for many years, prices have been growing rather quickly recently (an average of 6 percent in Q1), especially in large cities, where young professionals prefer to settle. In Munich, Stuttgart, Berlin, Düsseldorf, Hamburg, Frankfurt and Cologne housing has risen in price by more than 14 percent in the past year — the biggest increase in the last 15 years. Rents in the same cities did not add even 4 percent for the year. The refugees who arrived in the country were indirect boomers on the German market. In March of this year, they received about 1300 apartments. Immigration was an additional factor in demand with a limited supply. To meet the demand, Germany has to build at least 430,000 apartments a year through 2020, but only about 270,000 new apartments were built in the country over the past year. As long as there are no signs that the economy is experiencing difficulties or interest rates and the unemployment rate are rising, the boom on the German property market will work to the benefit of the local market and the economy as a whole.

A population increase in a country, income growth and a fall in real interest rates make real estate a liquid investment. In Japan, the population is aging and shrinking, but in the first quarter of 2016 GDP increased by 1.9 percent, after ending last year at –1.8 percent. Thanks to an issue of currency, real interest rates are negative (the key rate in the country is now –0.1 percent). That, in part, is why Japanese real estate is the largest source of income for most investors, both foreign (mainly Asian) and local.

The latter do not wish to invest in other, more expensive Japanese assets, such as government bonds. In this case, one of the boomers was the bank. The January decision of the Bank of Japan to cut interest rates to a negative has lowered borrowing costs by encouraging residential real estate developers and buyers. As a result, real estate prices began to rise rapidly. In the first quarter of 2016, Japanese developers and individual buyers took out 6 percent more loans than a year ago, to reach a record level of more than 67 trillion yen ($655 billion). In addition, in Japan today, you can get a loan for 35 years at a rate of only 1.25 percent, well below the annual income from renting out a property. Low interest rates created other boomer in Japan. Wealthy buyers have been acquiring property in the capital, pushing prices up further. They rose more than 9 percent last year, with the average price of an apartment in Greater Tokyo reaching more than 55 million yen ($538,000). Many analysts called what happened in the Tokyo market a minibubble.

The creation of a boom on the residential market is primarily directed towards potential investors. They often take the bait and get ready to invest in local properties, which greatly increases their investment appeal. But, although the consequences of a boom are much less deleterious than those of a bubble, the market is still cyclical.

After a boom, there is always a declining phase, which means that investors risk not having time to invest and, instead of earning, will lose money.

The most successful scenario is to enter the market at the beginning of the boom, when there has barely been a price increase and demand is only beginning to rise and it will be possible to count on growth and profitability in the near future.

Often the government induces a boom, but then cannot always cope with the consequences. Examples of this were observed in the Australian cities of Sydney and Melbourne at the end of last year. After a boom from lowering mortgage rates, the government began building too fast and local markets suffered from oversupply, which was an impetus to reduce prices but, against the background of credit restrictions on foreign investors, capital inflows fell sharply. There are other situations when a boom goes out of control as well, for example, in a weak economy. Then it's just a catalyst, and the weak real estate market is not able to withstand the consequences. The United Arab Emirates (particularly Dubai) and Bulgaria are among these markets.