by Milton Johanides

Created on: July 27, 2010   Last Updated: July 28, 2010

The heady days of 20% a year capital increases on property purchases now seem like a dim and distant dream. The truth is it was a nightmare waiting to happen. The haphazard distribution of high risk mortgages on overvalued properties to owners who could ill afford the interest on the repayments was a massive miscalculation on the part of banks and brokers alike. If it was not a miscalculation, then it was tantamount to fraud. A lot of people made a lot of money from those mortgages, but as the numbers of repossesions escalated it became clear the situation could not be sustained. Nobody anticipated the cumulative effect around the world, and banks everywhere found themselves sitting on hundreds of thousands of defaulted loans. Some of them may not even have known they had them, a ballooning deficit of toxic debt, as it became known, which threatened the edifice of the world economy.

Disaster was narrowly averted in the short term by the injection of massive amounts of bailout money, trillions of dollars. The money was used to underpin the banking industry, but failed to inject demand into a failing property market. Two years later, property prices still languish somewhere near bottom and a long way from their 2007 peak. The reasons why we have not yet seen a recovery in property prices are as follows:

1) There is still a surplus of empty properties and properties that cannot be sold in the US and around the world, some repossessed, others left to deteriorate beyond repair.

2) Confidence in the property market as a cast iron home for your money has now completely evaporated. There are no guarantees anymore in bricks and mortar.

3) Prices are still too high. Most vendors are holding on desperately waiting for prices to recapture the highs of earlier years. But with confidence at an all time low and the rental market booming, they may be waiting a long time.

4) There are still too many people out of work, and those who are in work are being hit with higher taxes while having to endure a reduced level of social services. Too many people just can´t afford to buy their own house anymore.

5) Banks, who were treated generously by governments, have actually made it harder for people to borrow money.

As long as the above conditions prevail, we are unlikely to see anything more than the occasional flinch of life in the comatose property market. The worst case scenario is that the universal tightening of belts occuring in nearly all countries at the time of writing may tip the economy into a second recession and make things even harder for property owners.  The optimists hope that revitalised economies will grow at a sufficient pace to neutralise all the obstacles to a regeneration of the construction industry and ultimately the sale of properties. It´s a fifty-fifty bet which way things will go. Only time will tell.

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