by clicking the arrows at the side of the page, or by using the toolbar.
by clicking anywhere on the page.
by dragging the page around when zoomed in.
by clicking anywhere on the page when zoomed in.
web sites or send emails by clicking on hyperlinks.
Email this page to a friend
Search this issue
Index - jump to page or section
Archive - view past issues
Expat Investor : January February 2008
Fast Facts 22462 PROPERTY INVESTMENT January/February 2008 EXPAT INVESTOR 23 UK property 2008 forecast The exchange bond develops overseas Exchange Insurance (ExCo) has extended its award-winning Exchange Bond to property developments overseas. The Exchange Bond is a financial guarantee that acts as an alternative to the traditional cash deposit and has already been adopted by a growing list of 200 homebuilders throughout the UK and in Ireland. When buying abroad many buyers hold back because they are reluctant to part with large sums of money to developers overseas, especially on developments which may be several years off completion. By accepting the Overseas Exchange Bond, the developer is able to overcome this fear. And the buyer is reassured because if the developer fails to perform, the buyer has still retained most, if not all, of his deposit money ExCo has recently appointed Lucas Zachara as Head of Overseas Business Development. His appointment reflects the steep rise in the number of enquiries for the Exchange Bond from developers and intermediaries outside the UK as well as overseas property buyers. ExCo reports that it has developed these contacts with developers in Italy, Spain, Cyprus, Portugal and Hungary. Mr Zachara says, "We are very encouraged by the positive response given to our preliminary ventures overseas and, as a result, several new developers have already approached us to include the Overseas Exchange Bond as part of their marketing package. Interest is growing daily from developers, intermediaries and buyers alike." In return for the guarantee given to the seller, the buyer pays a premium for the Exchange Bond, but many developers refund the premium on completion as part of the sales incentive package. ExCo claims that the Exchange Bond is a cost effective, simple and safe alternative to the traditional 10- 20% cash deposit normally required, freeing a buyer from the burden of an often substantial cash deposit to secure a property purchase. The buyer pays 100% of the agreed purchase price on completion, which means that they continue to have control and use of funds that would otherwise be tied up as a deposit -- sometimes for several years. These funds can be used elsewhere to generate a further return instead. ExCo is a specialist European general insurer which is authorised and regulated by the UK's Financial Services Authority. House prices recorded another strong year in 2007, underpinned by significant economic momentum, ongoing housing shortages and strong buy-to-let demand. We forecast house price growth of 5-8% in December last year, and with two months left to go it looks like the middle to upper end of this range will be achieved. That being said, momentum is now fading, and a number of factors suggest that house price inflation will drop from its current rate of 9.7% to 0% by this time next year. The main reasons for this more subdued outlook lie on the demand side of the market, where a slowing economy, tighter credit conditions, stretched affordability for first-time buyers and lower house price expectations appear likely to reduce the level of activity. The supply-side of the market will still be characterised by widespread housing shortages, in spite of government targets to increase house building. These shortages will provide some offsetting support to prices amid the weaker demand environment, particularly in the south of the UK. House prices have now risen in excess of earnings for 11 of the past 12 years. For a considerable period of time, this had only a limited impact on the affordability of monthly housing costs, as interest rates fell to record lows. But now that interest rates have risen by 125bp since August 2006, mortgage payments are taking an increasingly large share of take-home pay, particularly for first-time buyers. The ratio of first-time buyer mortgage payments to take-home pay is now close to an all-time high, and there appears little room for it to climb further in a slowing economic environment. For affordability to come back to long- term norms, either earnings growth needs to outpace house price inflation or interest rates need to come down. Although we believe interest rates have peaked, they are only expected to come down slowly, as inflation Abbey Mortgages reports that 154,000 students are considering buying a UK-based university property; while some 88,000 current students and parents already own property, despite reports that house price inflation is cooling off. Research from Abbey Mortgages found that 14% of the current student population are looking to purchase a property in their university town. That's on top of the 88,000 who already live in their own place at university. As many as 66,000 of today's students want to buy a place of their own, while a further 44,000 have parents who are thinking about it. Another 44,000 are thinking about clubbing together with friends to buy a property. Of the 88,000 who already live in their own place, three-quarters of them have bought on their own or with friends, and one-quarter live in expectations are lifted by high oil and food prices, and the beneficial impacts of cheap imports from China begin to fade. For this reason, house price inflation will need to lag earnings growth next year, and this is a key driver of the overall forecast. Will buy-to-let keep booming? Buy-to-let investors have been a key support to house price growth in 2007, and have replaced some demand from first-time buyers dropping out of the market. But as interest rates and house prices have risen, rental yields have become much less attractive and investors have had to rely on house price growth to deliver good returns. As the slowing economy causes house price expectations to be revised down, there is likely to be less interest in new buy-to-let investments, particularly from those with shorter investment horizons. On top of this, the credit crunch is likely to lead buy-to-let lenders to tighten their rental cover and loan- to-value (LTV) criteria, making it more difficult for new investors to enter the sector. Yet, while poor yields, lower house price expectations and tighter credit conditions are all likely to take some froth out of buy-to-let and limit its contribution to price growth, recently reported fears of a mass exodus from the sector appear overdone. The growth in buy-to-let appears to have been driven by a shift in preferences toward property as a retirement provision, following the equity bear market earlier in the decade and the emergence of large deficits in company pension schemes. This is consistent with survey evidence suggesting most landlords are long-term investors rather than speculators, and that they would not exit the market abruptly. Even with only modest house price growth, those in it for the long-haul can expect satisfactory returns. Our overall view of buy-to- let is therefore that the rapid growth of recent years will moderate, but properties that their parents have bought for them to stay in. Nici Audhlam Gardiner, Head of Mortgages at Abbey, tells Expat Investor, "Britain's student population continues to be a source of income for buy-to-let property investors, many of whom are parents of the students or the students themselves. "The key issue with any mortgage, but a buy-to-let one in particular, is affordability. People considering it need to make sure that they can afford the mortgage payments plus any maintenance costs, service charges and down-time between tenancies that they will also need to cover. "A bbey's competitive buy-to-let range takes these costs into account when deciding affordability so people can be sure that they are not stretching themselves too far." Fast Facts 22461 University property purchases remain popular Fast Facts 22460 Nationwide predicts that UK house price growth will pause for breath in 2008. Use this forecast to find the outcome for your property investment over the coming year. Fionnuala Earley, Nationwide's chief economist, provides this forecast for 2008. that pessimistic sentiment about the sector's prospects should not be exaggerated. Risks to the forecast The future is inherently uncertain, and it is impossible to rule out other unanticipated events having either a negative or a positive impact on house prices. Based on the information currently available, 0% inflation is our best estimate of the most likely outcome, but there are plausible risks in both directions. The main downside risk is that continued financial unrest or a US recession cause the economy to slow even more sharply than expected, leading to a more significant rise in unemployment, higher levels of forced sales and lower house price expectations. On the upside, there is a chance that the pronounced economic slowdown we are predicting will not materialise. The economy's quick recovery from the Russian debt default crisis in 1998 showed that while global financial market shocks may lead to sudden losses of confidence, this can sometimes prove temporary and not impact strongly on future economic activity. It is also possible that the current forecast underestimates the upward pressure on prices from supply shortages, or the degree to which first-time buyers will be willing to increase spending on mortgages in order to fulfil aspirations to homeownership. If realised, no growth in house prices may come as a disappointment to many homeowners, but must be put in context. House prices have risen very strongly over the past decade and have delivered large gains in financial wealth. From a longer-term perspective, a year of flat house prices will contribute more to the future stability of the market than a year of 10% inflation and ever worse affordability. Now may well be a good time for price growth to pause for breath.