In his regular money advice column Dave Deruytter looks at the rise and rise of the housing market.
Real estate investments keep going strong, so do real estate prices. What is the magic behind this trend and what could change it?
Real estate is an important and valid part in any balanced or diversified investment portfolio. Graphs showing its performance over the past century prove that all too well. In quite a few countries real estate even outperforms the stock market over such long periods.
There are many ways to invest in real estate. For a start there is the choice between private real estate and commercial real estate, just as you can choose for direct investments or indirect investments in real estate. The most common investment in bricks and mortar is obviously one’s own home. Many countries tax that investment, the place where you live, very favourably.
If you invest in your only own home in Belgium, you will not only get a lower purchase tax rate – your mortgage loan will often be eligible for tax deduction if you pay your taxes here. Recently Brussels Capital Region has changed its system and made the first €17,5000 of the purchase of your only own home tax free. Not without taking away the tax benefits on your mortgage loan though. Still, if you buy an apartment of €250,000 as your only own home in Brussels Capital Region, you will only pay the 12.5% purchase tax on €75,000, which is kind of reasonable when compared internationally.
Indeed, Belgium is generally very expensive on the purchase tax side of private real estate. However, it is cheap on the taxation of owning real estate, and capital gains are not, or rarely, taxed.
What about the state of the real estate market?
With few exceptions the private real estate markets, all around the globe, are generally doing very well in the aftermath of the financial crisis of 2007/2008. Indeed, since 2012 prices are increasing year by year in almost all markets. Prices are strongly correlated to the level of interest rates though. As the US interest rates were the first to increase again, and are now among the highest in the developing world at almost 5% for mortgage loans, signs are that that market will slow down first or even see a decline. Even a crash is not impossible, but given that authorities and lenders have learned some lessons from the past, it may be less harsh or even not materialise.
Still greed is part of the capitalistic world and in the US today there are again many non-bank lenders active in providing mortgage loans, about 60% of the number of new mortgages as compared to 30% in 2013. Those non-bank lenders are often funded by the regular banks, making the latter more exposed to real estate than meets the eye at first sight. In conclusion, the risk of a crash in the US market is there, be it apparently less so than in 2007/2008.