The Pros and Cons of a UK Housing Price Decline

I don’t typically like to speak negatively of other people’s comments and/or forecasts but I had to say something about this one.  In the most recent UK Housing article by propertytalk

(http://www.propertytalklive.co.uk/index.php?option=com_content&view=article&id=9993&catid=64&Itemid=85), Assetz House Price Watch not only made a statement today that house prices have increased but that the forecast for UK housing is positive and according to their index, they do not see a double dip recession within the anticipated future.

I am sorry but who is he kidding.  Just two days ago, the Nationwide Building Society released statistics stating otherwise.  They detailed that UK house prices fell in July for the fourth time in five months. Furthermore, the Nationwide House Price Index fell 0.7 per cent in July from June and the index now stands 2.6 per cent below its level of a year ago. Nationwide said the reading was the biggest year-on-year decline since August 2009 when Britain was mired in recession.  House prices are on average 13% down on their 2007 peak.  The good news is that this is better the majority of our European counterparts. 

Just today, JLL released a study, the Residential Eye Report 2012, stating that the “UK Housing industry is facing serious headwinds, both immediate and long-term.”  This doesn’t sound like a promising forecast to me. 

I believe that it is important here to explore the reasons associated with why prices are declining and what impact that this is going to have on residential investment.

Why are house prices dropping?

In my opinion, two reasons:

•         Lack of liquidity
•         Collateral damage from the Euro Crisis

The banks are not lending.  As a result of the last Credit Crisis, the banks have not fully recovered and thus are buyers are not able to obtain the financing required to purchase a home.  It is a perfect storm: lenders are requiring larger deposits and the buyers have less savings to provide as a deposit due to recessionary market conditions.  Stuart makes mention that he does see a double-dip in the cards.  We are in the middle of the double-dip.

However, is it necessarily a bad thing? 

Depends on the investor.

If you own the property, then obviously not.

If you are looking to purchase a property, it depends on your investment objectives and horizon.  If you have a short-term view, I would probably advise veering away from UK residential investments – except for London.  London has proved itself to be very resilient and the UK numbers would be a LOT worse had London not been in the picture.  According to a recent study conducted by UBS, London residential is considered the premier property safe haven city globally.

If you are seeking yield and has a long-term investment horizon, I do agree with Stuart, it could make sense to invest in non-London regions if you have the stomach to endure a possible further drop in house prices.  Due to house prices being low and supply not increasing (resulting from the lack of construction financing) within the foreseeable future, one may be able to purchase residences that offer 7%+ yields.  However, unlike commercial properties, there is the hassle of upkeep, wear and tear, etc. that one must be mindful of when purchasing this type of investment.

If prices drop, the average home purchaser will be able to afford more and the average investor will be able to obtain a higher yield – as long as rents remain or increase.  Due to the lack of rental supply and the fact that the US multi-family model has not made its way to the UK yet, most analysts do not foresee a drop in rents any time soon.