Why the basics look so bad for investment in UK property
Posted on 08 July 2011 with 10 comments from readers
Still historically high house prices, very low rental returns and interest rates that are so low that they cannot last. This is the toxic cocktail facing would be investors in UK housing this summer.
Say you can raise the mortgage and have the large deposit necessary, why is this such a bad deal? Well, put simply you are taking a massive capital risk with money that is not yours and that will still ultimately have to be repaid or the house given up.
No different this time
It was the same story in the late 80s. Yuppies as they were then called bought apartments that they thought would only ever go up in value. Recession hit, interest rates rose and house prices slumped.
Many were trapped in so-called negative equity, with loans outstanding larger than the market value of their homes. If they were lucky they sat tight, unable to move because they could not afford the loss. If they were unlucky then they lost their jobs and their homes and went bankrupt.
Never say never again. Markets go round in circles. In the UK the next phase of the cycle has to be rising interest rates to tackle runaway inflation – inflation is already several points ahead of base rates. Higher interest rates will depress property prices and then the property repossessions that follow will exert further down pressure on prices.
It is the down spiral that is the converse of the long bull market from 1993-2007 that has been very slow to turn. But the higher you spiral the harder you fall in the other direction.
Eventually market forces will bring prices to a new equilibrium where prices are affordable to the average buyer at higher interest rates. It will take a few years bumping along the bottom for the market to absorb this status quo and then the shortage of supply will kick in to start prices rising again, no doubt aided by a gradual loosening of lending criteria.
50% downside
It is possible in this process for house prices to fall by as much as half in real terms, that is after adjusting for inflation and certainly after adjusting for devaluation. High general price inflation may mask this nominal price decline somewhat but it will be real enough for investors.
But devaluation is the other big worry for foreign investors from Arabia where ArabianMoney is based. The much trumpeted independence of the pound sterling gives the UK the capacity to ease the impact of falling asset prices on the national balance sheet by revaluing the currency downwards.
In the 1970s the pound reached parity with the US dollar. Imagine what that would mean for an Arabian investor buying a home in Park Lane today with the pound at around $1.60, even allowing for the fact that Central London house prices are supported by the predominance of super-rich foreign buyers.
So if you are a dollar-buyer of UK property then add devaluation to the list of overpricing, low rental returns and interest rate risk, and you have a picture of why the basics look so bad for investment in UK property.
10 Comments posted by readers:
as ever, spot on.
However, at the top end there is little concern for price or value – all they’re concerned with is location. Uk is relatively safe/secure environment in which to educate the kids with the last revolution but a damp squib back in 1688 (we don’t count the colonials
.
Anyways, so the top end drop a million or nine £ – it doesn’t matter to them – especially if you’re chairman of British Gas …… check out today’s monstrous 18% increase in charges!
No wonder the money-related suicide rate is climbing.
You paint a bleak picture, but the truth is even bleaker. I have a habit of writing a bit much so I’ll be very brief today. Basically, and as I have stated before, many people here in the UK are only just holding on to thier homes even with interest rates and repayments at an all time low. The people at the Bank of England know that interest rates must be raised to control double digit real inflation, not just inflation at a few points above base rate as you mention. However if they do, many of the hundreds of thousands of people on variable rate mortgages who are already struggling may be pushed over the edge. I don’t need to spell out the chain of events that would follow, but ultimately both the domestic housing market and the Commercial property market would collapse within a year if the base rate went much above the 3% mark it should really be at by now (some experts suggest 5% or more is required to control what is becoming runaway inflation). The UK property market is still in a bubble which could be ‘popped’ by the spike of an interest hike at any time. So, yes you are right, the basics do look bad for investment, but even more so than you suggest.
I am selling my UK property to buy gold and silver, as recommended by Rolf Nef in 2007. Better late than never!
Blah, blah, blah…Yet again, the editor is 100% wrong on “very low rental returns”.
The mentioned runaway inflation added to the difficulty of mortgage qualification is causing rental rates to rise. I’ve increased two properties by 20% this year and the yield in comparison to interest rate level is significantly better than the Dubai property circus. The next 5 years will be challenging for UK property and the over leveraged will be battered, but stick to London and avoid any noise about investing in this region…it will destroy your wealth!
Interestingly, this article belies the facts in this report: http://www.arabianbusiness.com/mideast-buyers-behind-20-of-prime-london-deals-409357.html
Note specifically “It added that Middle Eastern buyers accounted for 20 percent of overall purchases, saying the figure had “risen rapidly over the past 12 months”.
Seems they know a good deal in this part of the world already.
Comment by philcu – 09 July 2011
I am selling my UK property to buy gold and silver, as recommended by Rolf Nef in 2007. Better late than never!
philcu,
Paul King
” Comment by Paul King – 09 July 2011
Blah, blah, blah…Yet again, the editor is 100% wrong ”
Can you give us some examples where the editor has been wrong?
@ Paul King I’ve increased two properties by 20% this year and the yield in comparison to interest rate level is significantly better than the Dubai property circus
The yield on my UK property was close to zero because of the high cost of agent’s fees and maintenance. I literally paid GBP 150 to change a light bulb and then the UK Government wants its cut at 20% VAT on top. The cost of refurbishment would be 1.5 years gross rent. That was all OK when capital values were rising.
There are ways of mitigating these drawbacks of course. Then the UK tax service will have its hand out for a goodly portion of your takings!
@ Philcu: I can’t disagree with you for selling UK property for Gold & Silver, but you need to change your agent fast because you should only be paying 10% of rental rate and GBP 150 for changing a light bulb!! I’ve just had a complete heating system serviced, re-balanced and tested + a leak repaired from dish washer for GBP 150.00..carried out by skilled and qualified technicians unlike the dopes here.
@ Bob: The editor always selects poor comparisons when comparing UK/UAE property….Compare Dubai with London and his numbers are false…
Firstly; London property is totally different to the UK. 50% of property is bought buy foreigners that are generally cash buyers that will find the UK cheap with the weak pound.
80% of properties in London over £10 Million are bought by foreigners.
The UK is actually a safe location and the rental return is much better than the bank base rate of 0.5% in the UK. The other factor that people do not take into consideration is the fact that money may not be safe or worth anything in the bank. In the long term, if there is inflation then house prices will pick up one day but once again not devalue as much as money in a bank as the rental income will go up with inflation.