Is it time to move back into property?
Financial Times
Published: February 1 2008 10:18 | Last updated: February 1 2008 10:18
Liam Bailey Q&A
The crisis in the debt markets has hit residential and commercial property
around the world. The past decade has seen housing booms in the US, the
UK,
Spain, Ireland, central Europe and beyond. But the property boom was
sup****ted by cheap credit that has now dried up.
So with property prices down, is the time now right to start buying again?
Are we heading for a global house price recession or will there be a soft
landing? Liam Bailey, head of residential research at Knight Frank,
tackled
your questions on the global property market. Mr Bailey has substantial
experience across the whole residential sector, from development and
private
housing to investment and affordable tenures.
Simply looking at graphs of house prices since World War II, it becomes
clear that every time prices boom they are followed by a decrease of
around
30% (adjusted for inflation). Why do large numbers of commentators
disregard
these graphs and seem to genuinely believe it is different this time?
Paul, Brighton
Liam Bailey: I agree, there is a tendency to view the housing market (and
actually all markets) on a very short term basis - the media could take
some
blame for this in that short term booms and busts do make for good reads.
There is an element of difference in the market each time however - during
the early 1990s downturn we did not have an expanding buy to let sector -
we
actually had a declining one. There are always slightly different
fundamentals which make it difficult to assume that the experience from
the
previous booms will pan out in the same way.
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I live in SW10 (London) and must receive three or four fliers per week
from
the likes of Knight Frank and others telling me that much is still right
in
the world and donıt worry prices will not fall too drastically. Isnıt this
in itself a pretty good contrarian indicator? I seem to remember quite a
few
similar market updates from equity market analysts back in early 2001.
David, London
Liam Bailey: There is no doubt that sales volumes are falling and
therefore
attracting your interest as a prospective vendor and particularly a
purchaser is more im****tant now than it was this time last year. However
there is a difference between volumes and prices. The last time we saw
volumes fall significantly was 2004-05, by upwards of 30% compared to a
long
term trend and prices didnıt fall, at least at a national level.
This time round we expect the same thing, mortgage volumes are already
down
30% or more on a year on year basis and the market is going to be tough,
however whilst prices have slipped in many locations they havenıt dipped
significantly yet. The flyers suggest that 2008 will be a buyers market -
but you already knew that.
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What is your opinion on the potential of the residential market in the
Middle East, i.e. Dubai, Abu Dhabi and Qatar?
Maarten, Qatar
Liam Bailey: The fundamentals look good. In demographic terms populations
are rising rapidly; in economic terms wealth is being created at a strong
pace. There is an conscious effort being made to widen and improve the
depth
and security of the local economy.
So there is more demand for housing and more money to spend on new, better
specified accommodation. So far so good. The problem comes when we look at
matching this future demand against future supply. There is no doubt that
development volumes have increased rapidly over recent years and there is
a
risk of saturation in the medium term if all proposals are followed
through.
The potential offered by the markets here really depends on your time
horizon - the short term and long terms both look good, the medium term
could be more difficult.
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How will the global credit crunch affect the property markets in Eastern
Europe? Which Eastern European countries do you think will do best and
which
are expected to fare worst? Globally, which property markets are the best
bets medium term?
John OıBrien, Ireland
Liam Bailey: While lending criteria across most European countries have
tightened, the impact of the credit crunch will be felt more in a general
economic slowdown than in a direct impact on the residential market,
although there are anecdotally increased restrictions on lending to
individual borrowers in Eastern Europe. That said, economic growth
prospects
for Eastern Europe remain very strong in comparison with Western Europe,
despite recent downward revisions to growth forecasts. The EBRD growth
forecast for Eastern Europe in 2008 is between 5 and 5.5%. Demand for
residential property in growing urban locations such as Warsaw, Sofia and
Bucharest, where prospects for employment growth are good, remains strong.
Furthermore, mortgage markets in Eastern Europe are less mature in terms
of
the range of products on offer and in terms of the overall size of the
markets than those in Western Europe. Consumer exposure to rising interest
rates is lower. There is no sub-prime mortgage market to speak of, and
rates
of mortgage indebtedness are considerably lower than in countries such as
the UK. Certain Baltic markets have seen property prices rise on the back
of
increased availability to consumer credit, and so we would expect property
price growth to remain subdued over the course of 2008 in Baltic cities,
as
levels of consumer debt are higher than Eastern Europe in general. Rates
of
growth in these markets have been unsustainably high over recent years,
and
the slowdown in growth is likely to prove a welcome respite for domestic
demand.
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All the signs are that house prices are set to fall fairly significantly
across the UK as a whole. What do you think will happen in the London
market
(and the central London market specifically)? Will domestic demand for
residential property (buying and renting), combined with a continuing
influx
of foreign money into the capital, see prices continue to hold firm/rise?
In
the event of a slump in financial services, would you expect to see a
significant reduction?
Chris Hawkins, London
Liam Bailey: The main issue in your question is whether London will be
somehow protected from the wider market downturn. There does seem to be
some
evidence so far that London has remained ahead of the UK market and has
not
seen the downturn experienced elsewhere.
In the central London market, and in particular the super-prime market,
there has been a degree of good news in recent months and these markets
appear to have motored on unscathed. However there is no doubt that London
is exposed, the financial services sector in particular underpins the
market
to a greater degree here than elsewhere and a downturn in City employment
will put downward pressure on the London market.
The unrelated issue regarding tax reforms for non-dom residents could also
have an additional negative impact on the London market. London ought to
be
the best performing UK region in terms of the housing market - however all
of the above issues taken together mean that there is little scope for
outperformance over the next year or so.
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Do you think the Croatian real estate market is likely to be attractive in
the coming months given the countryıs preparation for 2012 EU accession,
the
possibility of recession in 2008, and a high Repo rate by the Croatian
Central Bank due to inflationary worries?
Ali Dicleli, Reading
Liam Bailey: Security of title is less of an issue than it used to be, but
itıs still im****tant. Following the relaxation of development controls in
recent years, resort development has been facilitated and in the next
12-18
months we anticipate that the market will see a number of large scale
integrated resort developments.
Despite this, land assembly and planning can be problematic. However, it
is
encouraging to note that developments in certain areas (especially coastal
areas) remains tightly controlled. Economic growth prospects are good, and
the tourism industry is increasingly strong and being encouraged by the
government, though it has not yet returned to the strength it exhibited in
the late 1980s.
Potential EU accession will undoubtedly raise the countryıs profile for
potential investors. Economic and employment growth prospects are good.
Prices along the Dalmatian coastal areas have been rising quickly over the
last two years, as have prices in the capital Zagreb.
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Credit has dried up. However, wonıt the easing of interest rates, which
has
started with the U.S. eventually reinflate the world economy and
potentially
cause serious inflation problems in the next couple of years, thus making
real estate a strategic choice as one asset class to hold to mitigate
inflation risk? Or could substantial inflation pressures cause interest
rates to spike and put many property holders in dire straits because of
the
cost of the rising cost of capital?
Carey Vandenberg, White Rock, B.C.
Liam Bailey: Interest rate cuts are usually undertaken in order to provide
a
boost to the economy. The cut will only be inflationary if resources in
the
economy are employed to full capacity. At the moment the US economy
doesnıt
appear to be in such a condition and therefore there appears to be less
risk
of inflation. Even if inflation did begin to rise, the most noticeable
effect could be to see a decline in the value of the US dollar, which
would
ultimately sup****t the domestic economy and increase ex****ts.
There are continued fears regarding the US financial markets, which pose a
far greater risk to both the global and US economy and property values
than
the risk of slightly higher inflation. A tem****ary cut in interest rates
does not seem to be such a significant risk. A sudden spike in inflation
is
unlikely unless there there was a speculative attack against the US
dollar,
which seems unlikely.
The effect of an increase in inflation on the property market - this is a
tricky question. Much depends on the pro****tion of mortgages that are with
a
fixed or floating interest rate. For fixed rate mortgages inflation would
be
blessing, and a curse for floating rate mortgages. I wouldnıt suggest
hedging against inflation if youıd have to use borrowed money. Hedging
with
equity could be more justifiable, especially if youıre investing with a
long
term horizon.
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Iıve no other debt, but my mortgage is 4.5 times my salary. Is it time to
seriously consider a re-think?
MK, London
Liam Bailey: It all rather depends on your view of the market, the
security
of your employment and your ability to generate future income growth. You
might think you could sell and move to a smaller property or a cheaper
area
- which might make sense. However, for most people the decision to play
the
market with regard to their own main residence collapses when they
consider
the cost of selling, moving, legal fees, stamp duty on repurchase and all
the other costs we have to put up with.
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Do you expect it to be a matter of months or of years before prices in
Spain
will bottom out and what level of price declines do you expect (relative
to
peak prices)? Moreover, should one distinguish between domestic and
tourist
property or will they suffer equally? In which areas or sectors would you
expect the best buying op****tunities to arise? Finally, would you consider
investing in real estate mutual funds a sound alternative to buying a home
or a flat?
Joris Buyse, Luxembourg
Liam Bailey: Spain should not be viewed as a homogenous market. While the
general market has slowed, price falls have been restricted to certain
areas
of Spain, notably overdeveloped coastal areas. Rates of growth in these
areas had been unsustainably high. A loss of confidence amongst buyers has
been exacerbated by extensive media coverage of allegations of, and
convictions for corruption of local authorities, illegal building and the
repossession and demolition of properties in some areas - though this
represents a tiny pro****tion of the market. This largely affects the
second
/ retirement homes market.
For the most part the primary homes market, although it has slowed, has
not
collapsed. The next 12-18 months are likely to be a critical period - it
is
likely that over the remainder of 2008, the market will remain depressed
and
some coastal locations with particular oversupply problems may see further
falls, although some markets - notably Madrid and Mallorca - have
weathered
the storm better than others. We have already seen interest from
experienced
investors looking to purchase at the bottom of the market. Prices for
quality products with a reputable agent and developer have tended to hold
their value better.
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