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UK Update
Sunny Outlook or a North Sea Bubble?
| Text : Neil Runcieman | Photo : www.thinkstockphotos.com |
There are currently two schools of thought regarding the UK property market, and that’s putting it mildly. The bulls, including barks Citigroup, BNP Paribas, and the president of the National Association of Estate Agents (NAEA), forecast average rises of up to 10 percent during 2010.
The bears, among them Nationwide Building Society, and estate agents Jones Lang LaSalle, Knight Frank and Savills, see the market on the crest of a mini-peak and about to decline - also by up to 10 percent. And some analysts paint a darker picture still: financial media group Bloomberg has published a survey indicating a 10 percent price decline in 2010 and recovery to 2007 levels only in 2014, while rating agency Fitch sees prices plummeting a further 20 percent overall before the turnaround begins.
The problem is that both sides - the bulls and the bears - have a convincing story to tell.
From the bulls’ side, the indicators are positive: prices have risen 9 percent since the February 2009 low, while according to estate agent Rightmove, the January price rise was the highest since April 2007 and London house prices are now at an all-time high.
Demand far outstrips supply, too. Buyers who had to put all their property dreams on hold when the recession set in are now flooding back to the market, eager in many cases to escape from rented accommodation and purchase as soon as possible. House searchers rose 25 percent during 2009, according to the NAEA, while Rightmove reports visits to its website up 26 percent against January 2009. Against that, estate agents have some 30 percent fewer properties to sell and just 118,000 homes were built in 2009, the lowest total since 1946. Inevitably prices are rising, and particularly in the higher-value areas most attractive to investors.
Add to that an increase in first-time buyers from 19 percent to 23 percent, suggesting that mortgages are finally being made available to low-deposit borrowers again, and a new influx of buyers from the resurgent financial sector (15 to 20 percent of all enquiries in January 2010 compared with 5 to 10 percent in August 2009), and the result is a market primed for short-term profit.
Even the prospect of a May general election - typically a price de-stabiliser - can be spun as a positive: according to this scenario the Tories opposition will win, stringent spending cuts will follow to reduce the national debt burden, and more foreign investment will ensue, adding still more value to well-located properties.
For the bears, those same factors, placed alongside the UK’s disturbing underlying economic worries, point to a market more likely to implode than bring spectacular yields.
Firstly, they argue, the January rise in Value Added Tax, increasing fiscal tightening by the government, growing unemployment and the impact of a fiercely disputed election will all serve to increase supply and undermine demand.
Secondly, the current ‘mini-boom’ (or ‘mini-bubble’, depending on your level of pessimism) has been fuelled to a large extent by purchases from equity (bonuses and debt-free baby boomers, mainly) as opposed to debt. Only GBP10bn was lent in mortgages in 2009, less than 10 percent of the 2007 level. Moreover, the recent house-price recovery owes more to the huge cuts in the Bank of England’s base rate to 0.5 percent than to economic optimism, and those rates will have to be reversed in response to rising inflation (2.9 percent in December 2009).
Deeper-seated fears about the US dollar’s potential to fall still further as the US papers over its own problems with more printed money, driving oil prices up and sterling down with it as the economy inflates, also weigh heavily on a country that has seen its currency fall 35 percent against the euro.
Finally, there is widespread agreement among analysts that the market is seriously over-valued, whether the calculation is based on a price-to-income multiple, price-to-building costs, or the price-to-rent calculation used by The Economist.
On one question, however, the bears and the bulls agree: for the best value, maximum investment security and highest return on property in the UK, stick with London.
For the bulls, London is the world’s financial capital, attracting huge foreign investment in high-value properties from people in Asia, Russia and every other place bursting with new millionaires. Massive infrastructure investment is also guaranteed leading up to the 2012 Olympics.
For the bears, London is best placed to cope with an energy crisis, will lose fewer jobs when cuts are made, and will have the lowest risk of defaults and price slumps in the event of interest-rate hikes thanks to its high level of debt-free owners. And of course it creates the best-paid jobs and attracts all those wealthy foreigners.
For Hong Kong investors, even despite the dollar’s decline and the fact that UK property has not been a star performer recently, there can still be an upside, particularly for long-term investors - a factor for anyone looking to repatriate back to the UK, move there at a later date or buy rather than rent for a child going abroad to study. UK prices have risen 60 percent in the past 10 years (compared with only 30 percent in Hong Kong).
And while The Economist’s most recent report suggests UK properties are overpriced by almost 30 percent, there is one country whose over-valuation factor stands at a terrifying 52.9% - and this despite a recent major recovery. Surely no one could make money by investing in property in a madhouse like that. Now what was that place called? Oh yes: Hong Kong.
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