Time to sell UK property not to buy

Tempting as the articles placed by UK estate agents in the regional press might be with their claims of low mortgage rates and attractive exchange rates, this is a time to be selling property in the UK and certainly not buying it.

Ask the owner of Harrods, Mohammed Al Fayed, he sold out last week. But buyers are always tempted into markets that are topping out but unfortunately when markets look most attractive is usually when they are most deadly.

Low mortgage rates

Yes, mortgage rates are low, very low. Indeed they are so low that they will soon have to go up. Yes, the dollar to pound exchange rate has fallen but what is to stop it falling very much lower?

Buy a property in the UK now and you risk buying an asset that has risen very strongly in price since the deep recession of the early 90s and now faces a big reversal of this trend. It is all very obvious if you only care to think rather than react emotionally to the pull of buying a property.

The new coalition government in Britain is not in charge of interest rates but it is going to have to borrow a great deal of money to finance its deficit. It is also competing globally for these funds. Inflation is picking up in Britain so bond holders will gradually push up interest rates or they will go elsewhere. Actually the interest rate rise could come very soon indeed.

Then again consider the British pound. The new coalition is committed to five years outside the euro. Why is that? Is it so that the government can turn the pound into a strong currency or devalue it to boost exports and competitiveness?

The two factors work together: devalue the pound and interest rates have to go up. Both are prima facie problems for real estate investors who face a long bear market in the UK after a couple of spectacular decades.

Rents too low

Rental yields tell the same story. Prime central locations in London such as Knightsbridge, South Kensington and Mayfair offer rental yields of about 2.5 per cent. That is an insufficient return on capital employed, so how can it possibly be a good investment? For that you are relying on greater fools to pay even higher prices.

Buy UK property now and you are being fooled by the pre-election euphoria and the failure of any major political party to discuss the appalling reality of the British economy during that election. As the austerity program now emerges to tackle the deficit similar in size to Greece this is no time to own property as an astute businessman like Mohammed Al Fayed well knows.

Put it another way: do you want to buy an asset that will fall in price in a devaluing currency with a mortgage that will go up sharply and rental income that will never pay the mortgage? Rent an apartment in London if you need one – that is a real bargain – but do not buy one.