Time to buy a home in the UK?

Posted on 16 July 2008 with no comments from readers

Many British expats living in the Middle East are contemplating whether to buy property at home now that the UK housing market has crashed. But the same investment opportunity is also available to other nationalities who are all allowed to own property in the country.

This correspondent bought a house in Surrey Quays in London Docklands in 1993 at the bottom of the last housing slump and made a tidy profit selling out in 1998, far too early as it turned out as the housing boom continued through to last summer.

One item that caught my eye in the British press this week was the sale of a three-bed house in Surrey Quays at auction for $350,000, exactly 50 per cent down from the price its owners were trying to get a year ago. This is an extreme case but the RICS reports that transactions in the housing market stand at a 30-year low.

Is this then the moment that offshore buyers have been waiting for, the long awaited correction in UK property? The easy answer is yes. However, the market has probably not hit the bottom yet, and trying to catch a falling knife in any market is dangerous. Besides, many of the houses you see in estate agent’s windows are priced unrealistically – that is to say they reflect what owners hope to be paid rather than true market values.

It will take some time for sellers to become realistic about prices. But there is an air of capitulation about the UK housing market. The quick sale of UK mortgage firm Alliance & Leicester to Bank Santander of Spain this week shows how times have changed; Alliance & Leicester gratefully accepted an all-paper deal worth half the offer made by Santander as recently as last December.

Expatriate buyers have another problem. Getting mortgages as an expatriate has become very difficult. It is a swing back to banking practices of over a decade ago when expats were considered a poor risk. These days even an expat person with a good job will be required to put down a 40 per cent deposit.

UK house prices are one thing but obtaining credit is another. Market analysts contend that this is the most powerful force driving prices lower at present, and until the market bottoms even cash buyers should keep out. The only buyers these days are people who have no choice, or have not thought through the basic economics of their decision properly.

Just consider the position of owners who bought a year ago in the UK. The nominal value of their home is 10-20 per cent lower, perhaps already wiping out their deposit, while interest rates have been edging up. A young couple told me this week that it would cost them 40 per cent more to buy than rent.

Will the average house buyer be any better off this year, assuming that they can find a mortgage lender to suit their financial circumstances? It is hard to see how saving 10-20 per cent could be sensible when a fall of the same amount again is perfectly possible, and if auction prices are a guide that amount should be considered as the minimum likely fall.

This was certainly the lesson of the early 1990s when I was the business editor of Building magazine in London and had a ringside seat reporting on the housing market crash. I can remember advising one colleague to buy a year into the crash and being proved terribly wrong. Two years later he left with his wife for Australia and handed back the keys to the Alliance & Leicester which must have repossessed the flat at a loss.

In fact the tight mortgage market may be doing expatriates a favour in keeping them out of the UK housing market at this stage. Recessions test all the old rules, and there are no magic solutions. For example, the idea that the centre of London would be immune to house price crashes is proving completely wrong, and what has gone up most is coming down with equal velocity.

One of the best pieces of investment advice I ever had was from Dr Marc Faber who contends that buying into any asset class after a recent crash is never a good idea. His view is that calling a bottom and waiting for a recovery takes time and is at best uncertain. Look at the Nasdaq stock market crash in 2000, prices are still 60 per cent lower today.

This could also prove the case for UK house prices which became highly overvalued on any valuation yardstick. It could be that prices get so depressed like the Nasdaq that confidence in housing as an investment is broken for a generation.

In any case, I am not confident about a quick recovery in the financial sector which was not in nearly so much trouble during the housing recession of the early 1990s. Without mortgage finance house prices can not recover, and potential overseas buyers of British property would be well advised to wait for some indicator that the cost of buying a house is becoming cheaper before they rush to buy.

My signal in late 1992 was the pound’s exit from the European Monetary System. After that interest rates came down, and buying property became cheaper. But it was still three years before prices moved up meaningfully. So I would wait to buy or invest in precious metals which have a much better short term outlook.