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Wednesday, November 25, 2009

U.K. Housing Market May Not Recover Peak Until 2014

By Peter Woodifield, Bloomberg

Nov. 20 (Bloomberg) -- U.K. house prices will probably fall next year, and it may take until 2014 to return to the levels at the 2007 peak of the country’s biggest housing boom, according to a Bloomberg survey.

Nine of 14 economists and real estate brokers surveyed said they foresee a decline in 2010 after a surprise rebound this year. They predict an average drop of about 1.6 percent, with estimates ranging from a loss of 10 percent to a rise of the same magnitude.

“The market is still overvalued, whichever measure you use,” said Seema Shah, a housing economist at Capital Economics Ltd., a research group in London, who was the most bearish in the survey. “Prices need to fall a further 20 percent to 25 percent to get back their long-term trend.”

A 7 percent gain in average prices since April was driven by a shortage of properties for sale and won’t be sustained, according to Shah. Most survey respondents said they don’t think the rally can last while Britain’s longest recession on record fuels unemployment and makes banks reluctant to lend.

Prices plunged 23 percent from September 2007 to April this year, according to Lloyds Banking Group Plc’s Halifax unit, after losses on U.S. subprime mortgages led global credit markets to seize up. They remain at 2005 levels.

For all of 2009, the average home will probably increase about 5 percent in value, to almost 161,000 pounds ($270,000), said Martin Gahbauer, Nationwide’s chief economist. Martin Ellis, chief economist of Halifax, Britain’s biggest provider of home loans, expects prices to be little changed.

120-Foot Garden

That’s no solace to sellers like Nicola Brookbanks, 37. She and her partner put their one-bedroom apartment in the Ealing district of London on the market almost three months ago so they could buy a house in nearby Acton with more space for their 14- month-old son. They bought the apartment, which has a 120-foot- long (37-meter) garden, for 315,000 pounds in March 2007.

After more than 60 viewings, and cutting the price by 25,000 pounds to 325,000 pounds, Brookbanks and her partner accepted their first offer of 318,000 pounds on Nov. 16. The transaction has yet to close.

“I am pretty surprised it has taken this long to get an offer,” she said.

U.K. residential real estate had almost tripled in value during the decade before the credit crunch. The gains encouraged more Britons to pour borrowed money into homes and more “buy- to-let” investors to acquire property for rental income.

6.2 Times Earnings

At the market’s height, banks were financing loans as large as five times a borrower’s salary. That lifted the average price to a record 6.2 times earnings, compared with the long-term average of 3.7 times, according to Capital Economics. The ratio has since fallen to 5.2.

U.S. house prices, by contrast, are at their most affordable for at least 28 years, according to Lawrence Yun, chief economist of the Chicago-based National Association of Realtors. The average price of an American home is 2.4 times income, down from the high of almost 3.4 times in 2006.

Even at the peak of the U.K.’s previous housing boom, which ended in 1989, the ratio was only 4.7. Values then took four years to fall 13 percent and didn’t return to pre-crash levels until January 1998, almost nine years later.

“There is a problem with very high house prices, and getting over it is probably a good thing,” said Martin Weale, director of the London-based National Institute of Economic and Social Research. “I am optimistic that we will move back to a more normal level.”

Out of Work

Claimants for jobless benefits in the U.K. have more than doubled since March 2008, to 1.64 million. They may climb 17 percent more by the end of 2010 to 1.92 million, according to the average of 37 forecasts compiled by the U.K. Treasury.

“We are cautious on the outlook for the housing market and believe anticipated growth in unemployment throughout next year will apply downward pressure on house prices,” Graham Beale, chief executive officer of Nationwide Building Society, said on a conference call with reporters today.

There are already signs that the rally may be petering out. Prices in October rose by the smallest amount in six months, or 0.4 percent, according to Nationwide Building Society.

Sellers reduced asking prices for the first time in three months in the four weeks to Nov. 7 as demand dwindled before the Christmas holidays, said Rightmove Plc, the owner of the U.K.’s largest residential property Web site.

Prime London

This year’s recovery has been fueled by competition for the limited supply of London homes costing more than 1 million pounds, according to London-based broker Knight Frank LLP. Wealthy cash buyers have been lured by lower prices and the decline of the pound against currencies including the euro, dollar and Chinese yuan in the past two years.

In parts of central London, such as Chelsea and South Kensington, prices for the best properties are already back to 2007 levels, according to Robert Green, a partner at John D Wood & Co. Further behind are regions such as the West Midlands -- which includes Birmingham, the U.K.’s second-largest city -- where prices will take until 2015 to return to their peak, Knight Frank predicts.

“The recent rise we have seen is all about the imbalance between supply and demand, with very few properties coming on the market,” said Capital Economics’ Shah.

Rightmove has listed 934,000 homes for sale so far this year, a 45 percent decrease from the same period of 2007, said Tom McGuigan, the company’s spokesman.

Few Transactions

House sales in England and Wales fell to 26,662 in January, the lowest in at least 14 years, according to the Land Registry. In the first seven months of the year, they averaged 40,448 a month, or 61 percent less than in the same period of 2007.

The number of U.K. mortgage approvals is still half of what it was at the market’s peak, Bank of England data show.

Michael Saunders, chief economist for western Europe at Citigroup Inc., was the most optimistic in Bloomberg’s survey. He said recent nationwide price gains show that the British housing market could surprise again and rise in 2010.

Saunders, who predicted a 10 percent drop in 2009 at the start of the year, expects prices to appreciate 5 percent to 10 percent next year.

“You have had a test case, which tells you that low interest rates can outweigh the labor market,” Saunders said. “I changed my mind because of the data. Housing has been surprisingly strong.”

From October 2008 to March, the Bank of England cut its main borrowing rate to a record low of 0.5 percent from 5 percent, as part of a global effort to rescue the world financial system.

25% Deposits

For some potential house buyers, low interest rates don’t matter if the down payment is unaffordable. Lenders burned by the financial crisis are typically demanding deposits of 25 percent. During the housing bubble, the typical down payment was 5 percent, and buyers sometimes didn’t have to make any deposit at all.

With first-time buyers in London paying an average of about 180,000 pounds for a property, that means they have to put down 45,000 pounds in cash to get a mortgage.

Two years ago, Graeme Oliver, 45, and his partner had a mortgage lined up to buy a home in London that only required a 5 percent down payment. They scrapped their plans after she became pregnant because the property wasn’t suitable for a child.

Now the two physiotherapists, who together earn 80,000 pounds a year, will have to make a deposit at least three times that size to get on the property ladder, he said. To manage that, they’d have to borrow from his family.

They have put plans for a move on hold because they can’t afford anything suitable for a family. Oliver said he anticipates that more job cuts in London, particularly in public services, will lead to more house repossessions and lower prices.

“If the market doesn’t dip significantly in this part of the world, we will continue renting, probably for the rest of our lives,” he said. “I can’t see how it is possible house prices won’t be lower in a year’s time.”

The following table lists estimates for 2010 house prices and projections for when the market will return to 2007 levels.

Firm 2010 (%) Estimated Return
Forecast to Peak Prices

Capital Economics -10 2019
Fitch -6 to -8 2016/2017
Savills -6.6 2014
RICS -5 2012
Knight Frank -3 2014
NIESR -3 2015
Deutsche Bank -2 2016
Cluttons -1.5 2014
RBS -1 2013
Investec 0 2012/2013
Halifax 0 No estimate
BNP Paribas 3.5 2013
CEBR 4 2013
Citigroup 5 to 10 2012

To contact the reporter on this story: Peter Woodifield in Edinburgh at pwoodifield@bloomberg.net.

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