Market Musings 080723:
Real Estate - Snog, Marry, Avoid?

Is the real estate market investable today?

Summary:

  • Do Not Underestimate the Emotional Attachment to Property

  • Financing shock: Exiting the “zero rate era”

  • Employment is also a key factor for property…
    And remains at historic highs

  • Commercial real estate: Office stress captures the headlines

  • Demand and rental growth outlook is solid for many Commercial RE segments

  • European real estate fund NAV erosion slowed in Q1 2023, should stabilise over Q2-Q3

  • Conclusions: Exaggerating the Real Estate Risks?

Do Not Underestimate the Emotional Attachment to Property

It is said that “An Englishman’s home is his castle”. This idiom underlines the deep attachment that most people have to their homes. It is a key factor in why so many people choose to take on the biggest purchase by far of their lives, usually indebting themselves for decades in order to do so.

Shelter is a key need on Maslow’s hierarchy of Needs

From a psychological viewpoint (using Maslow’s hierarchy of needs), shelter is one of our key basic needs along with the need for sufficient food, water and warmth (listed below under “physiological needs”). It should not then be at all surprising that we yearn to own our own homes whenever possible, as we form a deep emotional attachment to where we live and want to customise it to our own needs and tastes.

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We may try to justify the decision to own our own homes on financial grounds - that property proves a good investment over time - but I believe that our primary motivation to buy our primary residence is far more emotional than financial.

Several studies have shown that over the long term, home ownership is in fact not as profitable as one might at first think, once:

  • Buying and selling transaction costs,

  • Property taxes associated with owning a home,

  • Maintenance and upgrade investment costs and

  • Interest costs incurred in paying back a mortgage

are all properly accounted for.

Pros and Cons of Home Ownership (US version)

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Did you know? Central/Eastern Europe has the highest home ownership rates

According to the World Population Review, Romania…

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