Heading for a fall?

Posted on January 22nd, 2016 by admin

Global economy watchers are warning that the world financial market is slowing sharply and the resulting property price bubble is about to burst. But how likely is this and what will it mean for the UK property market?

The UK is still experiencing high demand for and low supply of property. Outside of London and its suburbs, property prices are affordable because the interest rates have remained low. Property prices in London however, grew by 11 per cent in the last year alone, and the average price of a house was £503,000 in the second quarter of 2015, according to the Office for National Statistics. Rightmove echoed this observation by noting that asking prices in London are now 9.5 per cent – or £53,923 – higher than they were a year ago. Financial institutions have been arguing for a while that these rises are unsustainable and that a fall is inevitable regardless of what the world markets are doing.

The world markets themselves are in a state of flux. Russia and China, both economies that have been expanding rapidly, are now showing retreat with the value of their respective currencies falling. China, in addition has imposed limits on the amounts of money leaving the country thereby restricting foreign investment in such things as property. The Middle East too has begun to redirect its flow of investment inwards, improving its own infrastructure. This type of foreign investment has long been the life-blood of the UK buy-to-let property market.

In addition, economists have been quick to point to a catalyst of events that show a crash is on the way. First oil prices fall, already widely reported in the media. Then share prices will fall. RBS issued advice to investors on 14th January 2016 to: “Sell everything except high quality bonds.” Then finally, other assets will devalue with property following later because transactions can take three or four months to process.

While the harbingers of doom are stirring up the financial markets with worry, it is worth bearing in mind that the last economic downturn didn’t dent the property market significantly, especially in London. And the current UK housing shortage means the prices are likely remain high because of the demand. The Council of Mortgage Lenders reported an increase in November in mortgages for first-time buyers, movers and buy-to-lets showing the property market is robust.

Another significant factor to consider is the buy-to-let property market. Buy-to-lets could become a less attractive option thanks to the vagaries in foreign investors’ own markets and last year’s UK government budgets. The planned tax increase on buy-to-lets from 2017, the removal of mortgage interest relief, changes to wear and tear allowance and then the rising of stamp duty could turn landlords into sellers as buy-to-let benefits are eroded. It could mean more properties coming to market in 2017 but even that isn’t likely to result in prices falling. After all rental demand is still high, especially in the capital, and buy-to-let landlords will likely ride out the storm of negative equity because their mortgage repayments will still be covered by rental income until property values rise once again.

So the property value fall, if it happens, isn’t likely to be as dramatic as world economists are predicting. If you are a first time buyer, any price fall will make it easier to get onto the property ladder. If you are an existing property owner thinking of selling it may be wise to wait until the property values rise again. And if you are an investor, high rental demand means that even with the government’s removal of buy-to-let benefits, your income will still cover the negative equity period until the property values rise again. In a highly desirable city such as London, with a robust economy and new jobs being created every day, this recovery will likely not take very long.

If you would like advice and support in navigating the London property market, contact Property Divas who will be happy to help.

Rebecca, financial contributor for Diary of a Property Diva