While it is debatable as to whether the UK property market has turned, is about to turn or will soon enter a period of consolidation, there is a growing feeling that the worst is over. The last few weeks have seen a significant increase in the number of more positive reports on the UK economy which are sure to feed through to the property market in due course. However, while overseas buyers have been fairly rare in the UK over the last few months there is a feeling that if the economy is about to turn, this may be the best time for overseas buyers to look at UK property. Are we about to see bargains disappear for overseas buyers?
The UK economy
Even though it is far from certain that the UK economy is about to turn, the signs are that a period of consolidation (which could last up to 12 months) is on the cards ahead of a recovery in 2010. The scope and size of such a recovery is debatable, with the UK government looking at around 1.3% next year and independent third-party reports suggesting something approaching 0.1%, but in truth nobody really knows how quickly or how slowly the UK economy will recover.
The pound has collapsed against a whole raft of major currencies around the world with the dollar in particular strengthening substantially against the UK pound. However, the recent indication by the Bank of England that UK base rates may have “bottomed out” saw a short-term bounce in the UK currency which could continue if, as expected, we see further signs of recovery in the UK economy. This would slowly erode the “currency discount” available to overseas buyers looking at the UK.
UK property market
There’s no doubt that the last 18 months have seen the sharpest fall in UK property in living history with buyers literally disappearing and sellers clambering over each other to give their properties away. Even though there are signs of a stabilisation in the sector, it will still be some time before the full effects of the credit crunch, the recession and the starvation of liquidity for the mortgage market are allowed to pass through the economy. Those expecting a short-term bounce in property prices may well be disappointed with many experts suggesting it could be 2010 before we see any serious improvement in prices.
UK mortgage rates
As we touched on above, the Bank of England has indicated that UK base rates, currently at 0.5%, are likely to have bottomed out unless some unforeseen circumstance occurs and further reductions are required. As a consequence of the announcement by the Bank of England we immediately saw competition return to the UK mortgage market as mortgage providers are now able to plan ahead for the future in the knowledge that UK base rates have probably hit rock bottom.
UK mortgage liquidity
Liquidity in the mortgage market has been somewhat scarce over the last 18 months as UK financial institutions struggled to overcome growing debt concerns and were forced to place more and more money to one side to cover potential write-offs. As a consequence we saw the UK government forced to step in with significant liquidity in exchange for substantial stakes in the likes of Northern Rock, Lloyds Bank, HBOS and Royal Bank of Scotland. However, after literally months and months of trying to force UK banks to increase liquidity in the mortgage market there are signs that competition and interest is returning. This is a vital element of any potential stabilisation of the UK property market and should form a significant springboard for a recovery in 2010 onwards.
As we approach the budget on 22 April it is rumoured that the UK government has set aside around £1 billion to try and re-energise the construction sector. This will see the UK authorities taking significant stakes in building projects which were mothballed because of the recession, injecting much-needed liquidity into the system, and reducing unemployment levels. It is also believed that the government has put aside more money to help those struggling to pay their mortgages (even though many believe the earlier mortgage protection scheme has failed) and local councils will also have more funding available for social housing.
When you take into account the ongoing recovery in the UK exchange rate, signs of stabilisation in the economy, the return of interest to the property market, increased liquidity in the mortgage market and a general optimism starting to return to the UK, overseas buyers are starting to show significant interest in the UK property market. Investors from areas such as the United Arab Emirates, recent converts to the UK property market, are showing significant interest with many believing investors are looking to climb aboard before the UK pounds increases in value.
Whether there is such a rush to jump back on board the UK property market is debatable as we are by no means out of the woods yet, although the first signs of recovery in the economy have prompted a marked recovery in the value of the UK pound.
Smoke and mirrors
Many investors in UK have had their fingers burnt over the last 18 months with various government spokespeople stepping forward to suggest the economy had turned. While this time feels different in many ways, a number of investors are conscious they have been “duped” in the past and are more than happy to stick a “toe in the water” but not yet willing to commit fully. There’s also the fact that taxation in the UK will increase, national debt is at record highs and the UK consumer has yet to return to the high street.
Many overseas investors have been looking to take advantage of the weak pound over the last 18 months but were unwilling to commit to a property market which was effectively in freefall. Now that we have seen signs of a potential stabilisation in the economy and the property market there has been a marked increase in interest amid signs that investors are again willing to spend.
How quickly we will see a return to property investment levels seen two years ago remains to be seen, with some experts suggesting it could take a decade or more for the UK property market to recover in full, but confidence is starting to return. However, on a more negative note we saw the recent quarterly report from the Bank of America and figures which on the surface looked positive but underneath were buoyed by one-off gains. There’s also the small matter of $13 billion which the bank has had to set aside to cover projected bad debts in the short to medium term.
We may be able to see the clearing in the distance but those who believe we are out of the woods are maybe a little premature!