real estate 88.
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Real estate investment, we are repeatedly told, is a very simple matter that comes down to three things - location, location and location. Regrettably, however, this is a massive over-simplification, if not outright nonsense. Location may be the single critical factor at any given point in time, i.e. on a snapshot view of the market in question. But markets do not exist in a single frozen point of time - rather, they operate on a dynamic basis across time. And, as with investment in any and all markets, timing is everything.
The idea that timing is crucial stems from the universal experience that markets are cyclical. If you buy the "right" thing at the "wrong" time, you will lose money and thus be considered a failure or an idiot. But buy at the right time and even if you buy the "wrong" thing, you will be hailed a genius and a phenomenal success. This applies to real estate no less than to other markets and probably more so.
Much of the Western world, and almost the entire Anglo-Saxon world, has experienced a powerful and prolonged real-estate boom in recent years. In some cases, the boom can be traced back only four or five years while in others it has been underway two or three times as long.
In almost all cases, closer examination reveals a more uniform pattern: the last clear-cut downturn/slump in real estate ended in the early to mid-1990s, so that the upturn should technically be dated from the low-point of the last slump. However, overtly boom conditions emerged only much later in the process. In some countries this was in the late '90s, in others in the early years of the new century.
But the principle is clear. Irrespective of the location of the specific property, what is really important is the date of its purchase or sale. In other words, what matters is when, not where.
Thus, someone buying a prime residence, even at a sub-market price, in Tel Aviv in 1996 or a commercial property in Kiryat Atidim in 2000, generally has nothing to boast about today. Conversely, anyone who bought even a run-down slum in Dublin in 1998 or a crumbling condominium in Miami in 2001, has done extremely well for themselves - even if they paid over the then-market price at the time of purchase.
That is the micro view of the global property boom - and of Israel's non-participation therein.
Of course, there is a flip side to the timing issue. Anyone buying property in Dublin today, in Miami earlier this year or in most other hotspots of the Anglo-Saxon world, is likely to rue the day he signed the contract. Indeed, with regard to Miami and many other speculative foci in the US housing market, it seems that the worm has already turned and that prices are headed firmly and quite rapidly downwards.
But even where the speculative mania still rages - Dublin is a great example - the end result cannot be in doubt. The fact that the rental yield on residential property in the Irish capital is below 2% and the cost of the average home is now 14 times the average annual wage tells the whole story. Only the continued availability of cheap money and their own greed can be blinding people to the brutal fact that, at these levels, it is impossible to make money in the long-term.
There is, though, a macro story to the real estate boom. In fact there are two.
One is that the boom has been financed by huge amounts of debt. Although this factor has enabled the fun to continue much longer than it could otherwise have done, it also means that the risks being taken are much greater so the pain from the eventual fall will be magnified accordingly.
The other factor is pure macro: the rate of GDP growth in the boom countries has been influenced - in some cases, dominated - by the direct and indirect impact of the real estate boom. Notably, it is estimated that as much as two-thirds of the growth in US consumer spending since the recovery began after 9/11, stems from this source.
On the other hand, the Israeli economy is now in its fourth year of strong growth - a trend that seems to have successfully survived the impact of the Lebanon War - and yet the overall contribution of construction and real estate to this growth has been between zero and negative. Surprising and strange as this may seem, it is actually very good news. It means that a major potential contributor to growth has yet to kick in, and that the growth recorded since 2003 has been "good" growth that has not created distortions in the economy or exposed it to excessive risks.