According to Knight Frank, cash buyers have been boosting the estate agency’s own balance sheets this year as they have been taking advantage of recently falling property prices in Britain. The leading high-end real estate agency has managed to turn around talks of a 60-something-% drop in their profits this year to highlight the fact that there really is still plenty of money in the market.
So, if cash buyers are boosting the British property market, should you bite? If you’re an investor – whether onshore or off – you’ll be well aware that there are pockets of the British property market where it is almost always possible to make a healthy return in the form of rental income at least. We’re talking certain city-based locations, as well as in various suburbs in reach of the likes of the City of London for example. But are the fundamentals truly in place for you to buy in?
Contradicting Knight Frank’s talk of positivity in the market buoyed by cash buyers is a report out from Ernst and Young’s Item Club, the economic forecasting group, it suggests quite firmly that there will be no real recovery in the British housing market for five years – and even this report doesn’t begin to look at the effects that predicted inflation will have on any investment made today into British real estate…
The report from the Item Club suggests that the recent rise in house prices has yes indeed been buoyed up and supplied by cash buyers who have taken advantage of the first wave of a fall in house prices to buy in. The trouble is, everyone is looking at the peaks of 2007 as the ‘real’ value of a property and assuming that anything that is for sale below this peak is undervalued and therefore a bargain. The fact of the matter is, the prices the market reached in 2007 were not sustainable – i.e., the prices were false values. Until average wages in the UK significantly increase, the income to average house price ratio will be so far off a place of balance that house prices have to fall. It’s a fact and it’s a reality.
What’s more the fundamentals are not even in place for a healthy housing market in Britain. On the one hand there is limited and expensive mortgage financing restricting the market – and this is unlikely to change as banks attempt to improve their own balance sheets and their own share prices by reducing lending. And on the other hand what about inflation. It is widely predicted to be just around the corner for the UK and then, no matter how far house prices rise, the currency they are priced in will be buying a lot less in terms of other commodities!
We don’t think that even the Item Club’s predictions of a five-year period of negative readjustment for the UK’s housing market are realistic because it is going to take the British economy a lot longer to recover from the very damaged state it is in. Unemployment is set to rise, wages are set to fall in real terms if inflation does creep in, and until the banks make lending affordable again there is just no incentive to enter the property market for the vast majority of people. So, if you were banking on buying British property and seeing a return on your investment any time soon, think again – unless you buy distressed stock and can improve upon it, buy it in a location where there is some cash and not be worried about selling all that quickly. But if you want to buy to let and you have some cash in your pocket, you probably can make a profitable long-term buy in Britain – but then, you needn’t rush in either. You’ve got at least 5 years of falling prices according to Ernst and Young…
