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Overseas Investors Put off from Buying Prime Property

Compared to the rest of the market, prime property hasn’t really been affected by the current stagnation the rest of the market is experiencing. However, this may all be about to change, according to new research from Savills.

Prime Property

Savills specialise in high end property transactions and they have predicted that there will be a decline in the amount of sales and that it will become steady in the next 18 months. This is because within the last year from June 2011 property prices have only increased by 6 per cent for the top 5 per cent prime properties in London. This makes it the lowest annual growth for three years.

Since 2009 prime property asking prices have peaked at a 51 per cent increase. This is because of the high demand from overseas buyers who saw prime property in London as a better investment in the midst of the Eurozone crisis and the economic climate. The areas these investors have been most interested in are Mayfair, Knightsbridge and Belgravia. This activity has been slowing however since March, when the new Budget came in and a high stamp duty on these prime properties was introduced.

There are all kinds of additional costs that come with buying any home, including property insurance and now with the high stamp duty, this is putting people off.

Stamp Duty

Mr Osborne bought in the new stamp duty to crack down on tax avoidance.

Charles McDowell is a property consultant in London and he has said “There is no doubt that there has been a slowing up of the market since the budget, basically because foreign buyers are wanted to take advice on the situation before they come in and get a house.

“The difference with the prime market and many others is that very few owners have to sell, so you won’t get any flood of supply or the impact that it would have on prices.”

There are a few ways of getting around paying the stamp duty. One way is to sign a multiyear lease that gets automatically renewed each year instead of buying a property freehold. This means that the transaction doesn’t go over the £2 million threshold for paying the stamp duty. Although the government has said they will come down very hard on those who plan to use or advertise these schemes.

Lucian Cook is the director of research at Savills and he has said, “There is a very real prospect that the prime London market will pause for breath for a period while buyers absorb the changes to the tax regime.”
He went on to add, “In addition to the tax issues, you have the fallout from what is going on in the Eurozone. On the one hand it is driving people into London housing, as they see it as a haven. On the other, things have got so uncertain that there is a propensity to do nothing at all.”

Will the Eurozone Crisis Impact Mortgage Finance in 2012?

EuroSometimes somebody poses a question that is so complex that it’s nigh on impossible to answer – like how much would fresh instability in the middle east affect oil prices? Or whether the change of leader in North korea lead increase or decrease foreign direct investement in south korea? So as a landlord, you might just be thinking about the sovereign debt crisis in the eurozone and wondering whether it’s likely to affect your financing costs for next year.

Let’s face facts – your success as a landlord can depend just as much on finance costs than it does on buying the right properties, finding good tenants and all the other important factors. Low interest rates have resulted in lower mortgage for many landlords, but can we expect this to continue, and how would a crisis in the Eurozone affect this?

Scenario Planning

Following Cameron’s famous veto of the recently proposed tighter fiscal union, the eurozone leaders (in addition to the other countries wanting to pursue further integration) will now meet in March to discuss a solution to the crisis. Opinion is divided on whether or not the politicians will be successful, leading many to plan for alternate scenarios.

Indeed, with several eurozone countries having 10 year bond rates around the critical 7% mark, the fate of the eurozone (and of course, the euro) may not be in the leaders hands – some are already speculating that the pressures brought by these high borrowing costs could drive the euro to breaking point well before any deal to save the currency could be ratified.

Although others point out that the political capital invested in the euro, along with the will of germany to prevent a breakdown, will be enough to see the crisis resolved, the future is anything but certain.

Pressure on the Banks?

If the eurozone crisis did deepen (or, even worse, the euro collapsed entirely), the impact would likely be very bad for british banks. Disorderly soveriegn default could  squeeze credit availability harder than in the peak of 2008 crisis, not to mention creating a potentially negative outlook for the housing market (which typically also makes mortgage lenders cautious).

A squeeze in credit availbility would once again push up rates as banks shore up their reserves with safe assets – landlords with deposits over 30%+ on their properties would likely be alright, but those who’ve extended their portfolio such that thier LTV falls below 20% may see soaring rates. This would presumably heavily  affect the rising amount of “accidental landlords” – a phenomenon largely created by the banking crisis.

Not all opinion points at banks avoiding mortgages however – as many previously deemed safe investments become riskier,  the limiting of options can actually improve the attractiveness of alternative investments. This happened recently with UK 10 year bonds, which now yields just over 2%.  As the UK is outside of the eurozone, many banks may see UK mortgage debt as a relatively safe option in the medium term.

Staying Safe

It’s not just the credit availability of banks themselves that will determine mortgage rates next year – monetary policy in the UK could well shape this. Presently, most experts believe that the 0.5% rates will hold steady throughout next year, as the Bank of England look to battle low growth , but it’s hard to say that the situation would remain static in the event of a eurozone breakdown. Rising inflation caused by the criss, for instance, could force the bank’s hand to alter interest rates.

Even though current mortgage rates are well above the actual base rate – unlike before the crisis – a change in the base rate would undoubtedly cause mortgage rates to change, even if only moderately.

Ultimately, as stated at beginning of this post, these things are tricky to predict, and in the absense of expert financial knowledge or a crystal ball, it’s better to stay safe and guard yourself from rate fluctations – ensuring you have a healthly LTV ratio when refinancing is still likely to be the most effective fallback should rates be affected dramatically.

It’s worth remembering also, that any financial crisis tends to have an impact a great deal wider than just the cost of borrowing. Many forecasts for 2012 suggest that unemployment will continue to climb (potentially to around 2.85m) regardless of the eurozone crisis, making Landlord Insurance ever more important for landlords wishing to safeguard their income.

House Prices at Eight Year Low

A recent survey that was carried out by Halifax has revealed that the number of first time buyers in Britain has fallen to a record low in 2011. This news is somewhat unsurprising when we take into consideration the dire state of the economy and the particularly difficult year the UK has had financially.

House Prices

House prices have declined to their lowest levels in eight years; however this still hasn’t helped boost figures for first time buyers. This is due to the fact that those prospective first time buyers have struggled to raise enough money for expensive deposits and mortgages.

In 2011, it has been estimated that there were around 187,000 first time house buyers. That figure may sound like quite a lot, but when you compare it to last year, there has been a significant 7% drop.

Government Steps

These figures were released just a month after Chancellor George Osborne explained that he wants to do everything possible to help Britons get on the property ladder for the first time. The recession has been a very tough period for the UK housing market and Mr Osborne is clearly keen to work towards restoring the housing market. How long that restoration will take is anyone’s guess at the moment however.

In terms of steps the government is taking to help, Mr Osborne outlined details about a mortgage guarantee scheme. This is designed to help first time buyers with large deposits that would otherwise deter them from making the leap to get onto the property ladder for the first time. This would then inevitably help towards paying for property insurance as well.

What Will 2012 Hold for Housing Market?

Meanwhile, forecasts have already been made about house prices in 2012, and so far, it seems that they are set to continue falling. A 1.7% drop has been forecast with the housing market still vulnerable to any changes in the Eurozone. So, if the debt crisis worsens in mainland Europe, then we could see a further drop in UK house prices.

That would certainly make it easier for landlords to add to their property portfolio’s, which will only be a good thing for landlord insurance providers, but it would also make an increasing number of people even more reluctant to sell their home. Why sell at a cut price when you could wait to see if the housing market will bounce back is likely to be the attitude of many. What do you think will happen to the housing market, and the Eurozone, in 2012?