In the first of a two-part series on property hot spots for expats, we look at why the UK market is continuing to defy forecasts. Although the economy is in the doldrums and consumer confidence is gloomy, record-low mortgage rates and foreign buyers are boosting the sector. Harvey Jones reports.
It has been called the world's most inflated property market - and it shows no sign of bursting yet. It's the UK, of course, where a full-blown crash in house prices has been predicted since 2004, but has never quite happened.
In some property hot spots, prices have tripled over the past decade, from an average of £67,178 (Dh405,230 at today's rate) in 1998 to £214,162 a decade later, according to the lender, Halifax. The average homeowner in these areas are sitting on gains of more than £150,000, which explains why Britons are still deeply in love with bricks and mortar.
Prices have been punctured since peaking in 2008, but nobody can agree by how much. Halifax says they have dropped by 20 per cent, but rival lender Nationwide puts the fall at less than 10 per cent and Rightmove, a UK-based property website, reckons just 1 per cent.
Analysts keep predicting another crash, only to see prices rise 1.2 per cent in June. This resilience is remarkable, given how gloomy Brits are these days. Sinking in public and private debt, riven by public-sector strikes, battered by spending cuts and tax hikes, the UK isn't a happy place.
It is even more remarkable when you see US house prices down 33 per cent since their 2007 peak, with further falls expected. You could call it the housing boom that never ends, but can it really go on forever?
"The UK still looks like the world's most inflated housing market," says Colin McLean, the managing director of SVM Asset Management. "On the basis of historic measures of affordability, prices could still be 20 per cent overvalued."
As consumer confidence slides, house prices should ultimately follow, he says. "Real disposable income is unlikely to grow materially this year or next. With the UK being one of the most sluggish of Europe's major economies in the recovery, a further increase in unemployment is possible. Even though interest rates are lower than three years ago, lenders are demanding much bigger deposits and mortgage availability is tight."
Nationally, he says prices are just 7 per cent below their peak - and hitting new highs in prime central London locations. "This contrasts with much bigger falls in some other countries. The UK housing correction is not yet complete and the housing bubble seems likely to unwind further over the next year," Mr McLean says.
So why hasn't the bubble exploded yet? Record-low mortgage rates have certainly helped, with the Bank of England holding base rates at 0.5 per cent for 29 months.
Homeowners have also been treated far more gently than in the US. The UK has better state benefits, including support for mortgage interest payments if you lose your job, and the government has asked banks to show forbearance to borrowers in trouble. The result: 36,000 repossessions last year and 40,000 predicted for 2011. In the US, aggressive lenders are pushing through 1.7 million foreclosure proceedings.
The danger is that all this is simply postponing the day of reckoning, says Richard Banks, the chief executive of UK Asset Resolution, which took over £80 billion of mortgages after the collapse of lenders Northern Rock and Bradford & Bingley. He recently warned that Britain could face a "tsunami" of home repossessions once base rates finally start rising. Government attempts to keep people in their homes could actually backfire by forcing them even further into debt, he said, and a policy of "tough love" would be fairer to people struggling to keep up with their mortgage repayments.
Howard Archer, the chief economist of IHS Global Insight, expects house prices to fall by 10 per cent over the next year, as squeezed consumers start worrying about an interest rate hike.
Not everybody is so gloomy. There are three reasons why the UK should avoid a market washout, says Ray Boulger, the senior technical manager at John Charcol, the mortgage broker. "Mortgage rates are at an all-time low and likely to stay low for several years. Most buyers now have two incomes, rather than one, which makes buying more affordable. Finally, lenders are insisting that borrowers put together bigger deposits, so they aren't as financially stretched. All this makes the property market safer."
Prices may stay flat, but Mr Boulger doesn't expect a crash unless debt problems in Greece or deficit problems in the US spark a global meltdown.
Anybody wondering why UK house prices haven't nosedived, despite the economic tailspin, must understand that they are talking about two different countries, with two very different housing markets.
Halifax examined the 10 regions in the UK with the largest increase in economic activity and found that seven out of 10 were in London or the south-east. The bottom 10 were all in the north.
London and the south-east have been shielded from the worst effects of the recession, while the West Midlands, north-west and north-east have taken the brunt. Although prices are booming in smart London postcodes, northern cities such as Manchester, Liverpool and Newcastle are seeing a surge in repossessions.
Where the economy goes, house prices follow, says Nicholas Ayr, the director of Home Fusion, a UK buying agent. "Consumer confidence is flat, the economy is flat and so the property market is flat, too. We have strikes at home, an imploding high street and an economy on its knees."
There is one exception to the rule. "London is buoyed by overseas demand, the weak pound and its own local economy. Amid the chaos, there are formidable buying opportunities for those with the finance and confidence to make their move," Mr Ayr says.
Although the British are relieved they didn't join the euro, they aren't waving the flag for the pound right now. The sterling is down about 30 per cent against the single currency since the credit crunch. Foreign investors have taken note and are piling into London property.
London prices look formidable to locals, but newly tempting to wealthy foreigners, who have been snapping up £1m-plus houses. Cash-rich Chinese are the latest to join in the fun, busily snapping up new-build apartments as buy-to-let rental investments.
London should continue to buck the national trend, says Peter Rollings, the chief executive of Marsh & Parsons, an estate agency. "In prime parts of the capital, buyers are a healthy mixture of cash investors and those with hefty deposits. As a result, competition for each home has climbed to a level not seen since 2007."
A shortage of good-quality housing stock has also added to the pressure. "Prime prices keep climbing and the increase ripples out to the rest of London. In Kensington and Chelsea, sales prices rose by 6.2 per cent, twice the average growth for London's market. London offers great value for overseas investors who can exploit the relative weakness of sterling against the dollar and euro," Mr Rollings says.
Head north to, say, Burnley, and it's a different story. A two-bedroom terraced house in the Lancashire town recently sold for a mere £10,000, a third less than the asking price. It has been called the cheapest home in Britain.
The former mill town, like many northern towns, saw its industry collapse in the 1980s and has been hit hard by the latest recession. Property is cheap, but even at those prices, buyers are hard to find. Worse is to come. The North is heavily dependent on state largesse and will suffer most from tough public spending cuts.
Expats wondering whether now is the time to buy or sell property in Britain must understand the country's divisions. This is a land where you can buy a two-bedroom home for £10,000, while a parking space in Knightsbridge, London, could set you back £200,000. The average house price might be £163,049, but that's a pretty meaningless figure.
Anybody hoping for prices to fall in London could be disappointed. Barring another Lehman Brothers moment, foreign money is set to keep pouring into London and ripple out across the south-east.
The south is where the jobs, money and the people are - and that is set to intensify. The UK population is 62.8 million, but that could spiral to 70 million as early as 2026 because of high immigration. The growth will mostly come in the overcrowded south. Yet the UK isn't building enough houses to keep pace with demand, leading to shortages that should help keep prices high.
So it is conceivable that the housing boom that never ends never will end - at least in the south. This spells bad news for young Britons wanting to buy a place of their own. The average first-time buyer is now 38 years old - they used to be 30.
Eight out of 10 new buyers only get on the property ladder after borrowing money from their parents, known locally as the Bank of Mum and Dad. Based on current trends, the average first homebuyer will soon be 43 years old, according to the National Housing Federation.
Wealthy foreign buyers may have fun watching their dollars, euros, roubles and yuan stretch further in London, but the locals aren't enjoying themselves half as much. Life is grim up north - and looks set to get even grimmer.
In one respect, the UK has suffered a house price crash. Inflation is running high, at 4.5 per cent, according to the consumer price index. This means UK house prices have actually fallen by 30 per cent in real terms, using Halifax figures, which takes us back to 2002 levels.
This will come as a surprise to anybody looking to buy a property in London. But as you head north, it looks increasingly believable.
Next week: Distressed properties across the Mediterranean??