UK housing extremely risky and still not a good buy
Posted on 20 June 2009 with no comments from readers
UK house prices have fallen by 20 per cent on average over almost two years. Now a combination of low mortgage rate deals and rising rental yields are tempting a few brave souls back into the market, and prices ticked up slightly last month. But is this time to buy?
Surely the evidence of an end to the falling market is very slim. Any falling market tends to have the odd dead-cat bounce on the way down and the recent price rebound seems just another example.
Rising unemployment
Few would argue that the fundamentals of the UK economy are improving, particularly unemployment which has always been an important guide to house prices. Those losing jobs or fearing job losses do not buy homes, unless they have a screw loose: the risk of complete financial ruin is only too clear.
Improving rental yields are also tenuous to say the least. Around five per cent gross or less than four per cent net is hardly sufficient risk reward on an asset declining in value by 10 per cent per annum. You might get less on a bank account but the capital is 100 per cent secure.
Besides even if capital values were secure would four per cent be an attractive reward on any investment, let alone one that is likely to need personal care and attention, if only in watching a managing agent and compiling a tax return?
However, the real issue is that UK property is simply not a good buy from a commercial standpoint. There is no reason to expect a quick or sustained recovery in house prices, and the mechanism for a further down leg in the market is only too obvious.
Higher mortgage rates
The government bond market is under stress from surging public debt levels and in order to attract the large amounts of money required then interest rates are going to have to rise. This is already happening in the US where 10-year treasury yields are up and have immediately impacted mortgage rates.
The whole point is surely that UK mortgage rates are being artificially maintained at low levels that the country can certainly not afford to maintain for very long. Higher mortgage rates will follow within months if not a year or so, and that will definitely mean lower house prices.
Those buying now risk a crippling combination of rising mortgage payments, falling house prices and negative equity. That is surely not a reason to buy.
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By Harry Wallop and Myra Butterworth
Published: 7:02AM BST 19 Jun 2009
Public borrowing hit a record £19.9 billion in May, more in a single month than the Government borrowed throughout the 12 months of 2002.
With the recession continuing to take its toll, the Government is relying on a dwindling number of taxpayers to fund an increasingly large benefits bill – which in turn has forced it to raise more money from the bond markets.
The amount the Government raises from VAT, corporation taxes and income tax has fallen substantially in the last 12 months.
May’s borrowing was nearly double the £10.6 billion borrowed in April and the highest amount since records began.
The figures were much worse than economists expected, with one describing them as “absolutely dire”.
They came as official retail sales figures suggested shoppers, who in recent months have been out in force on the high street, are spending less.
Also, the Council of Mortgage Lenders warned that house prices will not see a significant recovery in the coming months, as figures show mortgage lending dropped further last month.
The trouble is UK property often looks a crazy buy and then goes up for years anyway.
I speak honestly as a housing bear and someone who decided not to buy a few years ago when property already looked overvalued relative to rents and earnings (at least by historical measures) and then watched it go up another 50%.
I actually think the UK economic fundamentals are hardening (I think we’ll be out of the recession in Q3 2009) but as you say the fly in the ointment is rising long term rates.
Housing is actually fairly affordable if someone can actually raise a mortgage today (from memory about 30% of household income – below long-term average) but it won’t take much of a rise from today’s rates to change that situation. And such a rise seems absolutely inevitable, unless we go into a depression after all in which case again you wouldn’t want to buy!
Be lucky!