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UK property: Is Now the Time to Buy? - RJA Properties: Lettings Agent Manchester
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20 May 2010

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Home information packs (Hips) will be consigned to history, the Government has announced.
17 Mar 2010

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Estate agents should be subject to the same levels of regulation as letting agents, it has been been stated.
22 Jan 2010

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Thousands of Britons with holiday and retirement homes in northern Cyprus face eviction after the Court of Appeal upheld a decision that a British couple must surrender disputed land.

UK property: Is Now the Time to Buy?


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Recent newsflow from the UK housing market has become much less negative in the last few months, leading some commentators to speculate that the market has already reached the bottom. In this piece we examine the latest evidence and look at future developments that will shape the property market going forward. There are investment opportunities out there, if one knows where to look...


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When the global financial system imploded last year, the media crowed that arrogant and overpaid bankers would get their overdue comeuppance and that the Anglo-Saxon "casino" and "credit bubble" economies would suffer disproportionately in the downturn. The moralisers said that it was only right and just that those who revelled most at the party during the credit spree would be the ones nursing the worst hangovers. However it didn’t pan out that way. As the global crisis has unwound the victims have been innocent bystanders who did not even attend the party. The collapse in trade finance has hit exporters in Germany and Japan hardest, while economies with sophisticated financial centres have been less harmed. The latest OECD forecast sees output falling by 6.1% in Germany and by 6.8% in Japan this year, while projected output falls in the UK, US and Switzerland are more modest at 4.3%, 2.8% and 2.7% respectively.

A similar pattern is being played out in the UK property market. Many commentators believed that the near death experience of the financial system would be catastrophic for the high end of the property market as the hedge fund industry was ravaged by redemptions and leveraged private equity operators were stymied by a contraction of credit. But the script hasn’t worked that way. There are signs of life at the top end of the London property market as talk of bonuses is back on the agenda.

Last month estate agents reported a pick up in acquisitions of prime homes and weekend country retreats by hedge fund managers and the like. The £10m plus sector of the market saw values rise by 1.9% in June, while £1m plus properties rose 1.7% in June, to record the third successive monthly rise. Indeed in the second quarter central London £1m plus properties rose by 3.7%. Are the green shoots in the prime prestigious property market an encouraging omen for the rest of the property market?

Property: Asset or commodity?


The answer is not necessarily, because the UK prime end of the market behaves more like a commodity than a place to live. Let me explain. For most of us the primary purpose of a house is a roof over our head. In areas where land is plentiful like Nebraska or Idaho, there is usually not much to choose between the prestige and convenience of different districts in spacious cities. In such areas house prices are linked to the nature of the accommodation rather than its location. Accordingly house prices tend to be affordable, stable and tend to move in line with income. Now let’s consider the UK, where land is not plentiful, increasingly location is the prime determinant of value. For example if you moved a mews property from Belgravia to Paisley in Scotland it would lose most of its value. It follows that the prices of properties in prestigious areas resemble a commodity in short supply. In recent months there has been a scramble for real assets as a protection against the inflationary consequences of printing money, there has been heightened demand for gold and the increase in demand for prestigious property for similar reasons. Furthermore it is no surprise that the prices of Government IOUs have been going in the other direction.

So we see the pick up in the London prime property market as a real asset investment play rather than a precursor to the pick up in the housing market generally.

First time buyers are the lifeblood of a thriving housing market


Indeed, the long-term prospects for the housing market are being held back by the dearth of first time buyers. At the moment, the market is being propped up by cash and equity-rich buyers and as such the level of transactions is very low by historical standards. New entrants to the housing market typically have to stump a deposit of 25% of the purchase price and mortgages available, as a multiple of borrower’s income, continue to fall. Furthermore the recent hardening of government borrowing costs has pushed up the cost of fixed rate mortgages. Rising unemployment and the spectre of job losses in the future is also deterring new entrants to the housing market. First time buyers are the lifeblood of a thriving housing market.

So although sentiment in the housing market has improved in the last three months, it is difficult to see enough new entrants coming through in the next twelve months to provide the basis for a sustained recovery in prices. Accordingly we see further moderate house price falls this year with the market remaining in the doldrums in 2010. It follows that we, as home owners, have to live longer with the fall-out from the credit crisis than its architects. As in the case of economies in general, those who took the most from the punchbowl of cheap credit will not necessarily have the longest hangovers.

In conclusion, despite the more encouraging data after the last few months, the low level of transactions and absence of significant first time buyer interest suggests that the UK property market has not yet bottomed. It follows that it is still premature to bargain hunt in the bombed out housebuilding sector. But there is an investment opportunity that chimes with our ongoing investment theme that real assets will thrive in the long run as overborrowed governments resort to the printing presses. The resurgence of prime London properties is consistent with the scramble to secure real, commodity style assets as a defence against future inflation. Prime estate agent Savills, which was on our "Tory Watch List" last month, is well placed to benefit from the upturn in activity and valuations in the prime sector of the UK property market.

 
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