It’s amazing how many people used to think ‘Well in the long term, residential prices always go up, don’t they?’ Alas this is just wrong - as the crash of 2008 has shown.
Residential property prices don’t always go up. In fact over the very long term property tends to appreciate in line with inflation – no more, no less. This is shown by long-term studies of property values such as the famous index, which recorded house sales and purchases on Amsterdam’s Herengrach canal from 1628 to 1973. The price increase over 350 years was indistinguishable from zero, after inflation. The same has been shown for US long-term residential property values. Property prices tend to cycle around a long-term mean.
Yet residential property can in fact be a great investment, protecting against inflation, paying good rent. And if you buy wisely, it will make you a nice capital gain.
So how to know whether you are buying wisely?
An important guide is the price/rent ratio (or yield), which will help you judge whether a property market is likely to rise or fall in value, long-term.
Perhaps surprisingly, the better your potential rent, the more your property is likely to be a good long-term investment. It’s often as simple as that. (More detailed explanation of gross rental yields here ).
Where rental yields are high, the likelihood is that the city will attract more buyers, and that prices will rise. That is why, wherever possible, we painstakingly collect rental yields data, for every investible country.
If rental yields are high, does it mean that it is a good investment option and I should invest immediately?
Well… not always. We present gross yields and not net yields. From the gross yields, you still have to deduct taxes, maintenance fees and other costs. Taxes can be high – check (we give you all the data, for all countries). You should also compare the gross yields with current bank interest rates, the inflation rate and the risks you are taking in investing.
How about places with seasonal rents?
In some markets such as the Caribbean and the Pacific, most rents are seasonal.
We don’t use seasonal rentals, we find the results unreliable. Where we cannot find reliable long-term rentals figures, we simply do not report rentals, or yields.
Data gathering method, sources
We base our data on web advertisements for upper-end apartments in prestigious areas, such as appeal to foreign renters - offers for sale, and offers for rent, of good (but not new) apartments.
We begin by defining key upper-end rental districts in the capital city, taking care to keep a database of where the properties are located, so as to ensure some measure of consistency in subsequent years. We carefully select appropriate price ranges. We take average prices, rejecting deviant outliers.
The sort of properties which will be attractive are not always the same type of property in all locations. Foreign renters are usually interested in properties which are in excellent condition, with good facilities, and which have been refurbished or redecorated within the last five years. Our properties are therefore likely not to be the very newest properties, except where new-builds dominate the market. In European cities, we lean towards properties in the historic city centres, therefore our 'typical' property is more likely to be a 90-year old refurbished apartment of character, than a newly built apartment.
The rental returns on owning property in different countries varies greatly. For instance in Europe, in early 2008, the range was from around 14.13% in Moldova's capital Chisinau, to 2.43% in Monaco. The trend is for rental income returns to rise, because prices are falling everywhere in Europe. However, as a result of the recent boom, in mid-2009, rental returns are lower in most locations than they have been for 20 or more years.
To some extent rental returns appear to correlate with risk. Most of Europe's 'high yielding' countries are in the East.
Gross rental yields: an international comparison
Gross rental yieldsin Africa
Gross rental yields in Asia
Gross rental yields in Caribbean
Gross rental yields in Europe
Gross rental yields in Latin America
Gross rental yields in Middle East
Gross rental yields in North America
Gross rental yields in the Pacific