Too Early to Buy British Housing

Includes: EWU, FXB
by: Peter Cooper

Property prices are still falling in the UK, but a combination of lower interest rates and a devalued pound is attracting expatriates to buy back home. It is still far too early, the best bargains are to come, and those buying now risk considerable capital loss.

Lest we forget how the leverage of a mortgage works in a downswing for property prices: the mortgage amount remains fixed and that means the first losses are to the deposit put up by the buyer, and then you go into negative equity, that is the horror of owing more than the value of your home or technical bankruptcy.

So the absolute cardinal rule of investment in housing during a recession - and nobody would dispute that this is not the most serious recession in perhaps two generations - is not to invest until prices stop falling. How do you judge that? It is simply a matter of waiting until the prices in the windows of the estate agents are not dropping.

Await a signal

A more scientific approach is to wait for some major change in macroeconomic indicators that signals a change of direction in house prices. In late 1992, the last UK housing recession, it was the pound’s sudden exit from the ERM that marked the turning point, and brought UK interest rates tumbling down.

This time round it might be tempting to see Bank of England interest rate cuts since last September in the same light. However, with the global economy falling off a cliff this year - with GDP and trade slumping - this is no time to be bold about buying houses.

Besides the history of the last UK housing recession in 1991-2 shows no prizes for rushing to buy. Prices did start to pick up in March 1993 but showed little meaningful progress for more than three years after that.

The risk is therefore heavily to the downside, with no upside for being quick to buy. You might have an ulterior motive for buying - securing that house in a prime location or providing your daughter with student accommodation, but do not confuse this with a good investment.

Yields too low

Look at the yields on UK housing. Yes, they are up from two to three per cent to around 4.5 per cent, but this is still low by historical standards. In 1993 yields were in double figures, and that implies another 50 per cent fall in house prices as higher rents look impossible in a recession.

It might be rather worse than that as the British economy faces unprecedented challenges now, and house price falls are going to be equally unprecedented.