Big business is being shaken fr om all sides. Today you are successful, and tomorrow Covid is knocking on your door. This experience taught many people to diversify their investment portfolio.
Now even the solid middle class feels how much money is spent on the first couple of levels of Maslow’s pyramid. Inflation eats up money exponentially.
For those who have money, the main headache now is how to save it. And to increase it in a good scenario, make it work and generate income. Is it relevant to implement such plans to protect money fr om inflation in the classic way: by investing in real estate?
What are investors afraid of? “Bubble” and real estate prices
It is profitable to invest wh ere there will be growth in the real estate market. Consequently, no one wants to consider an overheated market for investment purposes. Wh ere does the “bubble” fly and over what location will it burst?
The risks of bubble formation are usually assessed according to the authoritative annual report of the largest Swiss financial holding company UBS Group AG called Global Real Estate Bubble Index 2023. Revaluation of real estate globally began to decline in 2023.
According to the interpretation of the term real estate bubble and overheated prices, this cyclical phenomenon occurs when prices rise rapidly without sufficient economic preconditions. With falling demand, in theory, the bubble should burst.
The UBS report assessed the world's 25 largest cities based on 5 factors:
-
the relationship between the price of real estate and its profitability;
-
price-to-rent ratio;
-
changes in the mortgage-to-GDP ratio;
-
changes in the construction to GDP ratio;
-
comparison of prices in the city with the national average.
Cities with an indicator above 1.5 are candidates for a bubble.
According to UBS experts, the price imbalance has subsided; only Zurich and Tokyo remain at risk. A year earlier, the list included: Vancouver, Toronto, Amsterdam, Frankfurt, Munich, Zurich, Tel Aviv, Tokyo and Hong Kong.
Despite the fact that property prices in Turkey have tripled in a couple of years, Istanbul is not on the list.
And Dubai was included in the list of cities with fair real estate prices, along with Milan, New York, Singapore, Madrid, Boston, San Francisco, São Paulo and Warsaw.
In Dubai, prices continue to rise, but along with the incomes of residents and expats. The rental market is saturated with demand, and prices are still only 25% higher than peak prices in 2014, adjusted for inflation.
Is it possible to invest in real estate now and not go broke?
The UBS report finds that the past two years have seen a global surge in inflation and rising interest rates, which has led to a narrowing of imbalances in the housing market. Mortgage lending has halved.
A qualified worker can purchase living space 40% less than before the pandemic.
If interest rates remain elevated, then property prices are likely to decline. Since 2021, average mortgage rates have tripled.
Due to financing problems, fewer and fewer building permits are being issued, especially in Europe. There will be a persistent housing shortage.
The UBS report is available on the official website www.ubs.com
Property prices in popular investment destinations
Türkiye. Brief summary for 3 years
At first, everyone was surprised why a ready-to-move-in two-room apartment, in a new building with a swimming pool and hotel infrastructure, cost only 35-50 thousand Euros. Then they began to wonder why it now costs 100 thousand Euros. And we decided to look “better already in the EU.” But, alas, they didn’t find it for the same price.
Now the market is stagnating, there are few transactions, foreigners fr om the CIS are leaving en masse due to problems with residence permits and inflation. But prices from developers are not falling, quite the contrary. Why?
According to a report from the Turkish Statistical Institute TUIK in August, the construction cost index in Turkey increased by 66% compared to last year. The materials index increased by 52.18%, and the labor index increased by 113.27%. In Turkey, the developer buys the land, and then it is owned by the apartment buyers in proportional shares. Having looked at the prices for Arsa land for development, it is not difficult to draw conclusions.
Dubai. For safe investment
It still looks like a quiet investment haven with political neutrality, absence of conflicts, iron stability of the local currency, the highest standards of living and safety, 0% tax for individuals and many other benefits.
By the way, the share of oil revenues in Dubai's GDP is only 1%.
Average annual inflation in the UAE from 2017 to 2021 is about 2%. The UAE ranks 7th in the world in terms of GDP per capita. A kind of economic refuge for wealthy people and their capital.
Northern Cyprus. The island is washed by waves of development
Northern Cyprus is currently experiencing a construction boom and an influx of expats. And wh ere there is development, there is potential for price growth. Prerequisites: climate, sea, opportunities for English-language education, medicine, light life without city stress surrounded by nature, which many strive for. The demand for this will always be high.
Investors are surprised by the scope and format of construction projects in Northern Cyprus.
The island serves as an anonymous piggy bank for anyone who wants to hide their income from prying eyes using real estate.
Will concrete piggy banks become cheaper?
Inflation in many countries has increased so much that real estate prices have begun to lag behind it. If a new comfort class car is becoming more expensive, why shouldn’t real estate also become more expensive?
According to experts from the Bank for International Settlements (BIS), in 58 countries by the first quarter of 2023, taking into account inflation, real estate prices fell by 3.3% over the year. Which is the largest increase since the financial crisis of 2008–2009. That is, prices are rising, but at a slower pace than inflation. Experts also claim that in 75% of countries, prices per square meter are falling. But prices remain 6% higher than before Covid.
In EU countries, real estate prices decreased by 7% by the first quarter of 2023
Inflation in the EU settled at 5.3%.
Analysts at Goldman Sachs argue that prices will not drop significantly like this was expected after the rise in mortgage prices.
Conclusions:
In the EU, property prices are falling for the first time since 2014. For the second quarter of 2023, they fell by 1.7% in the eurozone and by 1.1% in the EU. Prices are falling the most in Germany, Denmark and Sweden.
Dubai continues to attract the richest and most successful expats from around the world. Flip deals with a small down payment and quick exit from investments thrive here. The demand for rentals and their profitability are growing steadily.
Turkey is frozen in anticipation, demand has slowed down and is being looked around, but real estate is not significantly cheaper. There is an opportunity to catch last-minute offers, as well as obtain citizenship through a simplified procedure.
Northern Cyprus is now a growing property market. The projects are large, but there is less and less land. Northern Cyprus is like Alanya 10 years ago, with its banana plantations, from which entire neighborhoods grew. They have grown and become more expensive.