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Even New Yorkers lucky enough to live in rent-stabilized apartments — approximately one million units and two million tenants, according to city data — are not immune to the growing housing crisis in their city. — © AFP
An unholy mix of a world housing crisis, a rental crisis, rising interest rates and a hot property market have created a minefield. The US losing its AAA rating will make things worse almost immediately. Interest rates have nowhere to go but up.
Property portfolios based on debt now have a serious risk of overreach in multiple ways. A lot of people have gone broke investing in property. This is exactly the mix of issues that causes mass bankruptcies.
The key to the problem is equity. In a hot expensive property market, even with low interest rates, equity is hard to get and harder to keep. Raising rentals is delusional in that respect.
You can pay mortgage money for years and not even keep your deposit. A lot of people are on interest-only payments, and they don’t actually own anything. They may or may not have good equity.
Example:
- A property cost $1,000,000.
- Debt is 60% of the price. You pay $400,000 upfront.
- Rent brings in 10% of the price of the property per year.
- Interest rate rises slash that income to 5% or less.
- If the property price goes down by say, 10%, you’re losing money rapidly regardless of rental income. You will continue to do so. The bottom line will get too close too fast.
- You will lose money until the price goes back up. That could take years. This is a notorious risk of property investment. Time vs money is not where you want to be.
An overextended property investment portfolio is a very serious risk. Unless environment. you could price yourself out of the market by trying to make up the difference with a higher rental.
The rental market is the worst possible environment to go looking for money, particularly now. People simply don’t have that money. Cost of living and other prices are going up severely. They can’t pay rent with money they don’t have. This is where “delusion” as the business model can’t work.
The market is also a competitor. Anyone can undercut such high prices and still make money. A debt-laden portfolio will not be able to take the stress for very long.
Renting in New York has long been a struggle, but recently costs have skyrocketed, jumping an average 20.4 percent in the second quarter of 2022 alone, according to the housing search website StreetEasy. — © AFP
Selling into a hot market can also be very high risk. The global property market is currently very much like a trampoline. It has its own ideas about whether to bounce or not and where and when to bounce.
The market is also trying desperately to hold onto every single cent. Naturally, people are fighting tooth and nail to save every dollar of their investments. How many valuations do you actually believe?
The problem is this market is very much a one-trick wonder. It knows only how to talk prices up. Experienced property investors will know that as investment advice, sales talk is utterly useless. The market has effectively talked itself into these price ranges and has no idea how to talk its way out of it.
Many investors have quite rightly gone defensive. That is the safest option. They are selling excess or tricky properties to reduce exposure. This is a very untrustworthy market environment. Cutting risk is definitely a far better move.
There is an alternative. Stabilizing cash flow is a good idea in any investment market. It’s easy to compete with hugely overpriced private rentals. Even a few hundred bucks a week lower would be a significant advantage in this market. You can lock in your cash flow and keep your portfolio stable with very little effort.
You can talk about affordable housing all you want. The critical issue for the world is access to housing. People can pick themselves up and put themselves back together if housing is available.
1.6 billion people are expected to be in what is effectively a generational housing crisis by 2030. The impact on the global economy and the property markets will be horrendous. Housing underpins the entire global economy.
Housing is not a luxury.
If the housing market goes, it takes the core global economy with it.
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Disclaimer
The opinions expressed in this Op-Ed are those of the author. They do not purport to reflect the opinions or views of the Digital Journal or its members.
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