British property not quite a bargain yet

Source : The Edge - 22 Mar 2009

“YOU REALLY SHOULD buy a property in London if you’ve got some spare cash; they’re going for a song!” a Londoner friend said recently. Indeed, after years of a property boom that saw prices triple, the UK housing market has crashed following the global credit crunch, with average house prices having fallen about 20% from their peak and the bottom of the market yet to be seen.

Anecdotes of prices of some central London properties plunging 50% — estate agent Hamptons International cites a London property worth £1million in December 2007 going for £470,000 in January 2009 — have attracted interest from investors, particularly foreign buyers drawn by bargain prices and a weak sterling. Recent figures from Hamptons reveal that properties in prime central London saw a 20% increase in European buyers in 4Q2008 y-o-y, while 12% more European and American investors registered to purchase property in the rest of the country.

Foreign interest has resulted in some central London property prices bucking the trend. According to property website Primelocation.com, prices in Mayfair and Knightsbridge rose for the fourth consecutive month in February by 0.94%, compared with the 0.56% fall in southeast London and 1.83% drop in southwest London.

Investors should, however, be aware that there may be further downside. Analysts warn that prices are set to fall further as they have yet to reach their fair value. Comparing total house prices with economic output, RAB Capital’s Dhaval Joshi said in The Observer that house prices will need to fall by another 15% before they are fairly valued. MoneyWeek reports that the UK house price-to-earnings ratio is currently 4.8, compared with the long-run trend of between 3.5 and four times, and that prices should fall another 17% to 39% before hitting fair value. Numis Securities, however, thinks house prices could fall by as much as another 55% if the market over-corrects itself to the same extent as during the 1990s recession. It’s a scary figure but highly possible, given the worsening economic outlook.

UK housing sales have remained at their lowest level since 1978, with an average of 9.5 transactions per agency over the three months to February, according to the Royal Institution of Chartered Surveyors (RICS)’s latest UK housing market survey. The Guardian reports that London agents are experiencing the worst transaction levels, with only six properties sold per agency over the three months to February.

The slowdown in transactions, however, is not due to a lack of demand. The RICS survey found that new-buyer inquiries in London jumped to a two-year high in February, as chartered surveyors reported a 44% rise in new-buyer inquiries, up from 25% in January. There is, apparently, strong interest nationwide, particularly in London and the south of England. Some analysts, however, see this as just “window shopping”, and do not foresee these inquiries leading to a marked rise in actual sales any time soon.

The reason for poor sales is the lack of funding, as the availability of mortgages tightens due to the credit crunch and first time buyers struggle to cough up the higher deposit or downpayment required — this now averages 25% of the property price, a long way from the 0% to 5% during the good times.

The current rate of mortgage approvals is still less than half of what it was a year ago, even if it has levelled out to an average of 31,000 a month for the past six months, as reported by the BBC. Last week’s indications that the Financial Services Authority may consider limiting the size of home loans in future to protect people from borrowing too much will certainly not help matters.

Grim unemployment figures — Office for National Statistics data revealed last week that unemployment has risen to its highest level in 12 years with nearly 2.03 million jobless in the three months to January — also means that would-be buyers concerned about their jobs will be reluctant to commit to a house purchase. Expectations of a further fall in prices are also holding back buyers; as Guardian Money editor Patrick Collinson said in his housing price blog recently, no one in their right mind would sink their life savings into a property if they felt it was about to drop 20% in value.

Anecdotal evidence suggests the contrary in some situations, however. Location will always matter, as well as a lack of supply. A house-hunting friend in Cambridge recounts situations where several of her offers for family homes were quickly outbid. The offers were for homes in a village location near good schools: Very few such properties ever come up in the market.

In the meantime, investors eyeing lucrative rentals should watch out for falling rental rates in London, where the top-end rental property market has been hard hit by cutbacks on employees’ rental allowance and by an exodus of financial expats from the City. According to Primelocation.com, prime London letting prices have fallen for the 11th consecutive month in February, registering 13.7% lower than the same time last year. Stock levels are up 97% on last year, as house sellers unable to secure a good price resort to renting out their properties instead. More and more of these “unplandlords” are expected to enter the market as the property sales market is not expected to bounce back any time soon, adds property expert Sarah Beeny in the Evening Standard.

Investors with spare cash would do well to tread carefully and do their homework before responding to the siren call of bargain British property.

Lim Yin Foong was editor of Personal Money, a Malaysian personal finance magazine published by The Edge Communications, from 2001 to 2006. She is currently based in the UK.