International Trends

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A row of London homes

For years, the property market in London was buoyed up by investment by foreign buyers, who regarded the city as a safe place to put their money during the financial turmoil following the 2008 crash.  But now, the city faces the threat of a bubble, according to Ben Habib, Chief Executive of First Property Group.

Between mid-2009 and the end of 2012, office space in London rose in price by 52%, and the luxury residential market grew at a similar pace.  According to the research group Real Capital Analyticals, commercial property deals reached nearly £21bn last year, and over 64% of the money coming into the market was from abroad, a rise from 61% in 2011 and 55% in 2010.

Amid fears of a breakup of the Eurozone and tax rises in the US, together with spending cuts and economic slowdown in China, the flow of money into London has slowed as concerns over the British economy have grown.

Britain’s economy shrank in the final quarter of 2012, and the country’s AAA credit rating could be in danger too.  The pound is weaker against the dollar than it has been for six months and that could make London a less welcoming investment environment.  As Jeffries real estate analyst Mike Prew puts it, ‘ prime London asset denominated in a secondary currency loses much of its investment appeal.’

Investment appeal is also divided between investors who are looking towards capital preservation, and investors whose concern is rental yield.  While the London market ha functioned well in terms of capital preservation its yields remain relatively low.  The West End market as a whole yields at about 5%, but some Mayfair properties yield under 4% and that figure is closer to 3% for some luxury developments.

The luxury residential market is suffering a hiatus as the effects of economic downturn percolate.  Several banks have made job cuts, leading to worries about demand strength, and some buildings are starting to drop rents to meet reduced demand.

It’s likely that investors will turn their attention to locations outside London.  Outside London and the Southeast, office values have dropped by 14% since June 2009, according to property consultant CBRE.  The gap in yields between West End London offices and property in the rest of the country is up to 10%, versus 1% to 2% before the 2007 crash.  There’s a sign that companies and individuals are “pressed against the ceiling’ of London’s property prices ” unable to spend less or earn more, many are seeking alternatives.

Not all observers agree that the property market in London is in danger, though.  Rightmove predicted a rising market over the coming year, saying that throughout 2012 the strength of London’s property market “stood out like a beacon against the rest of the UK.’  Nine of the ten regions whose prices Rightmove tracks saw property prices fall in December 2012 from the previous month and the only rise, in the East Midlands, was by 0.8%.

Frank Knight reported that London’s Kensington region continued to be popular with foreign investors, and Liam Bailey, Frank Knight’s head of global research, predicted that London would retain its safe haven status, and that this would encourage strong activity across all sectors of the housing market.  In 2012, 70% of London property sales were to foreign buyers, according to Frank Knight.

If London faces a bubble and the rest of the country faces stagnation, what does the future hold?  According to the financial management company PRUPIM, there could be a return of money to the very southern European markets that so recently saw investors flee to Britain.  At least one foreign investor is still interested in the London market, however: PRUPIM recently sold an Oxford Street block to a private foreign investor for £14.8m, reflecting a net initial yield of just over 3%.

Photo credits: Henry via Flickr

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The recovery seen in the global housing market in the latter part of 2009 and into 2010, has stalled badly in the latter part of 2010, according to the latest figures from the Global Property Guide. This is a blow for the industry and everyone involved in it, though it is truer to what economies are currently capable of supporting, and from here should allow us to find a steadier path back to a true recovery.

Global House Price Changes 2009 to 2010

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knightfrank-wealthreport2010

Knight Frank, in conjunction with Citibank has just released its 2010 Wealth Report. The 25 page PDF document confirms what we have already pieced together from multiple reports as 2009 progressed from the first quart throughout the second half:

Prime property — which suffered last at the hands of the financial crisis, but suffered just as hard –experienced a rebound in many locations in 2009, while many more (71% according to the report) locations continued to suffer.

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Knowing – or maybe believing is a better word – that property markets and economies around the world are on the way back up sure is a nice feeling. It may be a short-lived feeling, because according to some there are signs that the short-lived positivity will end as quickly as it begun.

I am not one of the people. But nor am I one of the plastic fantastic optimists that think the only way is up, and that rejoices in reports of UK mortgages doubling, and property in some areas selling for almost the same as it would have at the height of the boom.

The truth is, yes, we are making some headway against the deluge of negative financial news. In fact, a good analogy of the current recession recovery process for me, is a snow plough that has been completely submerged in snow: we have just jumped in and managed to get the engine started, the heat is slowly melting the snow, but we still have a hell of a lot of pushing to do before we clear the drifts.

Squaw Valley Ski Resort Lake Tahoe As anyone who has looked at buying a ski-property in the last few years will know, the global warming phenomena is causing a few problems for the class: meteorologists and other experts on the subject are warning that snowlines will be pushed up around the world.

In the short term global warming is expected to shorten ski-seasons at some of the lower resorts, and over the long term it could shorten the season at the higher altitude resorts and render the lower resorts out of business.

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Part I: America

In the last few months, the positive data has been rolling in on the American housing market; price increases, rises in new home starts and rising transaction volumes, including a somewhat astonishing 10.1% increase in home re-sales between September and October.

However, like with every almost everywhere, everything can be put down to the low interest rates and government incentives to buy a house and generally spend money. The tax incentives for first time buyers has just been extended to April, at which point the housing market will have to stand on its own two feet — unless it is extended again. Many analysts think this could spark the end of price rises and a restart to depression.

A good sign however is in the recent data from the automobile industry. It has been doing well because of the government cash-for-clunkers scheme. The scheme ended in October, yet analysts surveyed by Bloomberg still forecast a year on year rise in automobile sales for November. The analysts surveyed by Bloomberg have not been wrong in any article I have read so far.

This will instill hope that the foundations of recovery have been laid by the stimulus, and that the slow recovery can continue after it is removed.

However, the housing market is reliant on credit conditions easing, and on employment rising, or at least stopping falling, and also on wages rising.

There are currently thousands of US homeowners falling into arrears and likely to be repossessed if they cannot find a job soon. There are many more thousands only able to continue paying their mortgage one or multiple salaries or income-flows down, because of the record low interest rates. These too will likely face repossession when the government starts putting interest rates back up.

Such major increases in supplies of cheap properties, will almost certainly turn the price rises into falls when the government stimulus ends — if not before from the first group.

The number of potential repossessions will begin to fall as soon as the labour market starts to improve.

This of course will be helped by a de-restriction of the mortgage market, so that people can refinance for better deals.

What we also need to see is a significant increase in demand, which will offset the damage done by the repossessions. This will again rely on significant increases in the availability and security of employment and the availability of finance.

Spot a pattern here? Yes; the future of the US housing market post-stimulus relies on a significant increase in the availability of finance and jobs.

The availability of finance is gradually improving as the world stock markets become more profitable. But even the availability of finance is hindered by the labour market; the amount of finance the banks will provide will always be determined by the deposits and loan repayments people are making, which will of course grow as the labour market improves.

So, really it all relies on the labour market. Unfortunately unemployment is still rising. The unemployment rate in the U.S. jumped to 10.2 percent in October, the highest level since 1983. The government is determined to turn this around as soon as possible though.

The figures prompted Obama– having recently signed a bill extending jobless benefits — to promise new measures to find jobs for some of the 15.7 million unemployed Americans.

“My economic team is looking at ideas such as additional investments in our aging roads and bridges, incentives to encourage families and business to make buildings more energy efficient,” additional tax cuts, and more steps to ease the flow of credit to small business and promote exports, he said in a recent statement from the White House.

In fact it was also the rise in unemployment in October that led to the extension of the tax incentives for first time home buyers; it wasn’t for the housing market it was for the jobs it holds and may create.

So, it is the job market we must all be watching. If the government incentives can successfully bring sufficient recovery to the economy that employment starts rising before April, then maybe the housing market will be able to hold on long enough to survive till recovery proper without any further falls.

This article written by Liam Bailey of Property-Abroad.com

Around the world the recession is easing, or, at least according to economic indicators that is what is happening.

Much of Europe emerged from recession in the second quarter, including the big duo of France and Germany. Most of the rest followed in Q3 including Italy. US GDP grew 0.9% in the third quarter, and Italy’s an impressive 1%. Slovakia has also performed impressively; with growth of 1.6% in Q2 and 1.1% in Q3.