Newspapers are predicting falls in property prices in both the UK and Spain as more housing stock comes on stream and demand is hit by rising interest rates.
The Telegraph asks “Is the holiday over for the property market?” and cites case studies of amateur investors planning to sell up in response to the proposed rises in capital gains tax.
Robert Peston, the BBC’s business editor, argues that the only rational thing for buy-to-let owners to do is to sell quickly in response to the dithering of the UK’s new coalition government. Estate Agent Today agrees by predicting a huge surge in the demand for property auctions and suggests the capital gains tax changes will “devastate” the market.
Rises in capital gains tax are not the only thing worrying the markets. The abolition of home information packs (HIP’s) was greeted with glee by agents but numerous newspapers including The Guardian report the abolition has resulted in a surge in listings which will cause an inevitable fall in prices.
Even more worryingly, a boost to supply is about to correspond with some of the biggest fiscal cuts in the modern history which will push more properties onto the market as rises in unemployment force more borrowers into arrears.
Perhaps the biggest concern however is the rise in the inter-bank lending rate (LIBOR) as banks are becoming wary of lending to each other over uncertainty over their exposure to sovereign debt in Spain, Greece and Portugal. It’s almost inevitable these rates will be passed onto consumers.
Spain faces similar challenges to the UK in terms of falling mortgage demand and looks set to be hit by rising supply, again as a result of government policy changes.
The Bank of Spain (BoS) announced last week that it plans to ensure banks make provisions of up to 30% of value of property on their books which could reduce pre-tax incomes of banks by up to 10%,
The plans are only at consultation stage but the likely result is that banks will be more inclined to accept write downs on their property assets and reduce asking prices. Too many banks have been holding onto over-priced property, tightening supply and keeping prices artificially high. As Mark Stucklin puts it, agents and house hunters will be offered juicy discounts, if the provisions don’t push them into insolvency.
The positive for many in the overseas agents in Spain is that price reductions by the banks should force other sellers to lower their price expectations. Speaking to Spanish property agents on the Costas it is obvious there has been a stand off between buyers and sellers which has hit transaction volumes. A drop in prices is arguably the only way to address this in the long run.
Price reductions in the UK will not be universal and many areas like central London may avoid absolute falls. The rising pound which is close to breaking the 1.20 rate against the Euro will also offset falls by increasing purchasing power.
Most importantly, the UK buyers who are still purchasing (retirement and high-net worth individuals) are least affected by price falls as they don’t need finance and their decision making is driven less by investment criteria. Cash is king and the overseas property firms still in business adjusted to this fact a long time ago.