No need to rush back onto housing ladder

Source : Business Times – 6 Jun 2009

LONDON’S housing market has always seemed different. An oversupply of affluent buyers and an undersupply of good houses have always kept prices here higher than elsewhere in the UK. But that does not mean that London can achieve house-price inflation as a UK recession bites.

Prime London property rose as property prices in the rest of the country fell from November 2007, and did not peak until March last year. They then fell 24 per cent in 12 months, according to Knight Frank, a property consultancy.

Now a small bounce is underway. Prices across the capital rose 0.4 per cent in April and 1.6 per cent last month. Central London boroughs saw the biggest leaps, with Marylebone prices up 2.7 per cent and Mayfair climbing 2.9 per cent, Knight Frank says.

London enjoys two big advantages. First, it has more first-time buyers who can afford the kind of deposits now required by banks to take advantage of the slump in values and cheap mortgage financing – these will be £37,500 (S$87,600) at the very least.

Second, the slump in sterling has tempted international investors back in. A 25 per cent fall in the UK currency is a 50 per cent fall for euro buyers, for example. That has countered downward pressure on prices from Americans and continental Europeans returning home after losing financial sector jobs.

All this helps explain the boom time gazumping and sealed bid auctions, back for the first time in 18 months. Sales volumes, having halved between 2007 and 2008, are now up 30 per cent from last May.

So is now the time to get back in? Caution is needed. The preponderance of cash-rich buyers in certain areas may be dragging up values, but only in a market that remains very thin. Buyers are discerning and seem to be feasting on top-quality properties that have returned to the market after being withdrawn by vendors last year.

This looks like a high-end clearance sale. Once these properties are snapped up, London still faces the impact of a forecast 4 per cent contraction in UK GDP this year and UK unemployment rising over 10 per cent. That could yet tilt the supply-demand balance in buyers’ favour once again. Sterling’s surprising resilience also bodes ill for the confidence of overseas buyers.

Londoners should probably expect yo-yoing prices for the rest of the year. They would be ill advised to think now is the time to overreach themselves to join the party.