For many years it was a common tactic for Britons to move abroad and work hard for a few years, save their wages in a tax effective way and use the cash to come back onshore and get on to the property ladder in the UK.
However, in more recent years as house prices in the UK soared, those hoping to get on to the property ladder for the first time considered resorting to even more extreme measures by perhaps investing in property abroad in emerging markets in the hope that their real estate would rise in value so sharply as to outstrip the British property boom, thus enabling them to get in on what was a rapidly advancing and increasingly inaccessible house price ladder in Britain…
And then the UK’s economy took a massive battering, the property market was talked down to the point at which everyone assumed it was teetering on the brink of collapse, and suddenly the British housing market apparently became accessible again. Now we have news that house prices have risen in the UK by 1.6% in a month - so, let’s take a look at the UK property market from an expatriate’s point of view – is it time to get back in?
According to Nationwide, Britain’s house prices rose by their largest monthly gain in over two years in August. Apparently property prices expanded positively to the tune of 1.6% suggesting that since their peak in 2007, property prices in Britain have ‘only’ tumbled by just shy of 15%. So does this mean that the boom is back, and that you’re going to need to move fast if you want to bag a bargain before Britain’s housing market once again begins to shoot up in average value terms?
Well no, not in our opinion anyway.
Let’s look at a few fundamental and undeniable facts that anyone looking at the British property market needs to really keep in mind at all times…
The first fact to think about is that unemployment in the UK is rising – sharply. It currently stands at about 2.4 million, it is widely and expertly predicted to rise to 3 million in 2010, and against this gloomy backdrop the number of new vacancies appearing in British job centres was at an all time low over the summer since records began back in 2001.
With rising unemployment comes a few cold hard facts: fewer people will be in the market to buy a new property, fewer people will be in the market to move house, fewer people will be able to afford their levels of debt, and chances are the levels of repossessions in the UK will rise. Currently, thanks to the record low interest rate in the UK, (and allegedly banks being ‘nice’ to their defaulting customers – ha ha ha – yeah right, and I regularly see pigs flying in front of my office window these days too), repossessions have levelled out – but if unemployment rises, debt rises, and as debt levels rise, so repossession rates rise. And if the interest rate rises again…well, look out.
Repossessed properties historically do not push up average house prices in the UK!
If you’re bored of thinking about unemployment as a negative factor to affect the property market, what about the level of public sector debt that the UK is drowning in instead? It’s going to be a very long time before Britain is wealthy again – and the nation’s wealth is always reflected in its housing market…so we feel that the 1.6% increase was something of a positive blip before another significant fall.
Adding weight to our opinion is surely the fact that there is a very real and physical limit to how high house prices can actually go on average across the nation. After all – there is one factor that no one seems keen to talk about, it’s called affordability. House prices are still expensive in both real and historical terms when you compare them to the average household wage.
Did you know that there is an index that no one talks about much – it’s called the House Price to Earnings Ratio or HPER and it demonstrates how many years of gross earnings it takes the average person to buy an average home?
At its peak the HPER showed a price/wage ratio of a ridiculous 6.20 in 2007 – and at its most recent trough it bottomed out at a more realistic 3.12 back in 1995. On average it runs at a level of about 4.37 (over the past 25 years) and to reach either of the latter two values either wages need to rise significantly, (hardly likely), or house prices need to fall further.
Additional factors negatively affecting property prices over the longer term in the UK are the lack of mortgage credit available at the moment, (is that another example of banks being nice to their customers then?), the high levels of deposit buyers need to get a mortgage in the first place, and then what about inflation – we haven’t even mentioned that yet? If inflation kicks in in the UK then even if the sale board price of a home doesn’t fall, its value in real terms will.
So, is it time for expatriates to get back in to the UK property market? Well, that depends – it depends on whether they absolutely have to or not. If they don’t and they hold out for a while they may well discover that as the UK starts being a little more honest about the mess it’s in fiscally speaking and its currency once again weakens against other leading currencies and its property market falls further, they can bag an even better bargain if they just wait it out a little bit longer.
But of course, we could be wrong – and one should never try and guess either the bottom or the top of a market when making an investment decision!
