Has Te US Property Market Bottomed? What About The UK?

Having returned from New York recently, I was not surprised to read in the Wall Street Journal yesterday that the US ‘housing market has turned’.

It is fair to say that we have experienced a few false dawns over the past 5 years of slump, but some of the numbers coming out of the US now are encouraging.

According to a number of economists the US property market has bottomed. Forty four economists agree with this statement whilst only three do not. Economists are not always right, as we saw with the credit crunch and financial meltdown, but, in this case, the data are encouraging.

10% more existing homes were sold in May 2012, than in May 2011. According to the Wall Street Journal these purchasers were investors who plan to let them with a view to selling on for a profit as the market turns; this shows a level of confidence which has been absent from the market in recent years. Investors are looking for income now whilst anticipating capital growth in the future – a good strategy at this stage of the property market cycle.

Builders began work on 26% more US family homes in May 2012, than in May 2011. The stock of unsold new builds is back to levels last seen in 2005, whilst construction is now adding to economic growth and accounted for 0.4% of a US national growth rate of 1.9%.

So, how does this news affect the UK property market?

It’s all about confidence. The Credit Crunch and subsequent financial crisis emanated from the US and spread to the UK and Europe and manifested itself in a full blown sovereign debt crisis and banking meltdown. Real estate is a huge store of wealth for governments, banks, corporations and individuals and, as such, any improvement in asset prices is most welcome. It’s almost like printing money and as the financial system is fixed, these assets can again be leveraged. The only question is how long this will take.

In the meantime, there has been huge interest at home and abroad for high yielding UK properties. There are a number of reasons for this:

1. Cash rich investors are switching money out of banks and into property. This can be explained partly by the UK government guaranteeing only £85,000 per account per authorised firm (bank, building society etc..) if the bank becomes insolvent. This means wealthy individuals will need to spread their risk widely. For example, if you have £850,000 in savings, then you would be wise to deposit the cash with a minimum of 10 individual authorised firms to spread the risk of a financial institution failing. This risk is very real in 2012.

2. Investors are seeking to protect their cash from inflation. The real rate of return from a large number of banks is negative.

3. Savvy investors are buying income today and will trade it for capital growth tomorrow. These investors view UK real estate as a long-term savings plan.

4. Experienced investors are aggressively seizing the opportunities which the present recession and banking crisis are presenting. The market for distressed assets has never been better which is evidenced by the speed at which good value properties sell.

5. Finally, property investors holding foreign currency are taking advantage of favourable exchange rates with Sterling.

As a rule of thumb, in the present UK market, you should aim for a yield of not less than 9%. In many cases, higher yields are easily obtained, but as a guide to value, income is the best measure.