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UK Property May Face A Double Dip In Prices
July 22, 2009Article by Ray Withers
The trouble with falling UK property prices for investors is that the money dropping off the value is really transferred from the investor’s pocket and disappearing in to thin air or back to lenders.Take an investment property bought for £150,000 on an 85% LTV of £127,500 interest only mortgage two years ago.For arguments sake, that property is now valued at about £120,000 but still has a mortgage of £127,500.
From an investor’s point of view, what has happened is the £22,500 cash deposit from the investor has been eaten up by the price drop and negative equity.If the property is sold – the investor makes a loss on the investment as no money comes back and the negative equity needs cash input to cover plus there are selling fees to pay – assuming the £120,000 asking price is met.
If the property is held, then providing the mortgage repayments continue to be met by rental income, then given a lot of patience, the investor can sit tight in the knowledge that property values will eventually rise again, transferring the value back in to his equity account.
In this way, investing in property is no different from the current experience of people with money in the stock market.The problem will come when mortgage rates start rising, and rents don’t cover property outgoings.
A sensible prediction about property in London and the UK is prices haven’t yet fallen as far as they are going to in the recession and that we’re in for a double dip.The evidence behind this prediction is mortgage rates are only going to go one way – up. A cynic would say they are only staying where they are because we are due an election next year.
The number of jobless is rising and more people are going to find themselves in financial hardship as they lose their income and those lucky enough to have mortgage protection insurance come to the end of their policies.The housing market is like a huge boiler building up pressure with no outlet for the steam.Property investor and homeowners need to resolve their financial situations but lenders won’t help.
Something has to give and eventually, property owners will have to sell to cut their losses. This will release a glut of properties on to the market and push prices down again.For investors with cash, that don’t have the pressure of looming negative equity, buying distressed property at below market value is a good strategy – providing an exit plan is built in to take account of up to another 20% falling away property values.
If you are in the market for property investment in London or the UK, then Property Frontiers has a property-sourcing service that will meet your needs.