So, I know what you are all thinking. Probably the same as me – Ok its January 2019 now, the US and my real estate portfolio had a decent year, especially in the capital growth department. But what next? Is it still good value? Is it overpriced? How does it compare with Europe in terms of the prospects? Do I buy a few more now or do I wait in case there’s a correction?
I find it’s always good to logically think through the potential scenarios in this case, and then make a decision based on the most likely.
Here are three potential scenarios
These are big broad questions – there are many different scenarios, so we need to just focus on those most likely. If the GDP growth remains over 3% then on one hand that’s great news – a strong economy means people have money to spend on rent or to buy houses. It’s also likely that interest rates will keep rising to keep growth in the sweet spot and not overheat the economy. It’s not rocket science to consider that this will dampen house price growth, at least at the medium/upper end where mortgages are higher. However with our sweet spot at around the $60-$150k level, most buyers here are cash buyers so aren’t likely to feel much of a pinch from rising interest rates. Rising interest rates tends to mean inflation too, so that’s likely to mean a general rise in rents and prices. In short – not bad for a buyer, and good for those already in the market. If the current full employment remains, immigration remains relatively low, and utility bills fall (as is predicted) then inflation busting wage rises will creep in as employers have to pay more to keep good staff and have general staff shortages. This will bear out in rent rises too.
2. Economic growth decelerates
If, like some say, the interest rates have already gone too high and are negatively affecting the housing market and economy, then we have a slightly different scenario. If the edge is taken off house prices and the annual % growth slows (Buffalo prices grew at an inflation busting 13,2% in 2018) but a fall is unlikely. If unemployment rises substantially over the current 3.8% then wage growth may stall and with that the rapid increases in rent we saw in recent years could pause or even reverse. Lower rents could also mean investment level property is hit in price to keep gross yields steady. This is good news for new buyers but not so great for those with existing portfolios. However it’s more of an opportunity to pick up more at good value than time to bail out.
3. Economic growth stays steady
Although 1 and 2 both have good and bad points, things remaining healthy as they are is probably the best overall scenario for investors. Gently rising rents, gently rising house prices, and no disturbing news in a stable economy is every investors dream – boom and bust is good fun while the party lasts but rarely makes for happy investors.
It could well be argued that we’re due a full on crash in later 2019 or early 2020. None of the structural problems have really been fixed. The ‘bubble of everything’ looms. There’s a lot more pressure on the USD as the world currency, although on balance the sheer size of the US economy means that any risk of US losing its world hegemony are slim. Lending has increased this last year, as has the risk appetite from the banks, but we aren’t anywhere near the days of the 125% LTV mortgage for homeless drug addicts that epitomised the early to mid 2000’s. (Buffalo wasn’t affected by the following house price crash at all, interestingly enough, unlike neighbouring cities like Cleveland) However, house price growth since has been stellar, so in a crash situation there would certainly be some fallout.
So what should I do as an investor or a potential investor? If you think things are in boom-time territory, and a crash is coming, then perhaps look at taking profits and/or ways to short the market, and get back in when things bottom out. If you think the growth will continue, then it’s really fine to build up your portfolio, making sure you’re insulated against a crash by focusing on cashflow, avoiding over-gearing, and choosing ‘recession proof real estate’ where you can. (see my book with that name on amazon for more in depth analysis.)