U.K. Housing Still a Risky Buy

Includes: EWU, FXB
by: Peter Cooper

UK house prices have fallen by 20 per cent on average over almost two years. Now a combination of low mortgage rate deals and rising rental yields are tempting a few brave souls back into the market, and prices ticked up slightly last month. But is this time to buy?

Surely the evidence of an end to the falling market is very slim. Any falling market tends to have the odd dead-cat bounce on the way down and the recent price rebound seems just another example.

Rising unemployment

Few would argue that the fundamentals of the UK economy are improving, particularly unemployment which has always been an important guide to house prices. Those losing jobs or fearing job losses do not buy homes, unless they have a screw loose: the risk of complete financial ruin is only too clear.

Improving rental yields are also tenuous to say the least. Around five per cent gross or less than four per cent net is hardly sufficient risk reward on an asset declining in value by 10 per cent per annum. You might get less on a bank account but the capital is 100 per cent secure.

Besides even if capital values were secure would four per cent be an attractive reward on any investment, let alone one that is likely to need personal care and attention, if only in watching a managing agent and compiling a tax return?

However, the real issue is that UK property is simply not a good buy from a commercial standpoint. There is no reason to expect a quick or sustained recovery in house prices, and the mechanism for a further down leg in the market is only too obvious.

Higher mortgage rates

The government bond market is under stress from surging public debt levels and in order to attract the large amounts of money required then interest rates are going to have to rise. This is already happening in the US where 10-year treasury yields are up and have immediately impacted mortgage rates.

The whole point is surely that UK mortgage rates are being artificially maintained at low levels that the country can certainly not afford to maintain for very long. Higher mortgage rates will follow within months if not a year or so, and that will definitely mean lower house prices.

Those buying now risk a crippling combination of rising mortgage payments, falling house prices and negative equity. That is surely not a reason to buy.