Investing in property? Forget the UK – look to the US
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MoneyWeek Editor
John Stepek Jan 25, 2010
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As you might have noticed, we're not keen on British property.
UK house prices may have rebounded during 2009, but we don't think that'll last this year. Already there are signs that borrowing costs may rise as inflation picks up. Skipton Building Society had a nasty shock for its borrowers last week, as it warned its standard variable rate was set to jump.
With the employment situation still very weak, there are a lot more vulnerable people out there than normal. And that means that the situation could deteriorate rapidly if bills keep rising.
Of course, you could say this for most parts of the global economy at the moment. So does property anywhere look attractive?
The UK property market will have to plunge eventually
UK property bulls like to suggest that the British property market is fundamentally different from other places. The usual point made is the supply/demand argument. "We're a small island with too many people living on it, and too few houses, therefore house prices will keep shooting up."
But the reality is that house prices have been propped up by extremely low lending rates, which have enabled people to hang on to their homes even in dire economic circumstances.
And this hasn't just been the case in Britain. I was reading a report from an investment bank at the weekend about the difficulties involved in a eurozone country such as Greece leaving the monetary union (I have a feeling that we'll be writing a lot more on this topic in the coming year). In passing, the authors noted just how much low lending rates had cushioned housing markets in countries such as Spain.
Now you couldn't accuse Spain of lacking enough property. During the boom, it was one of the most overbuilt countries in Europe. And the unemployment situation there is, to put it bluntly, catastrophic. Yet prices there – officially at least – have only fallen at the same rate as those in France.
If low rates have protected a market in as dire a state as Spain's, then suddenly it becomes easy to see why the British property market is managing to defy gravity. The trouble is, you can't defy gravity forever. Artificially low rates can only last for so long. Once borrowing costs rise, prices will start falling again. Houses in the UK won't be back to bargain territory until they've had a real plunge. And that hasn't happened yet.
Special FREE report from MoneyWeek magazine: When will house prices bottom out - and how will you know?
- Why UK property prices are going to fall 50%
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Has the US seen a 'proper' correction?
So has anywhere actually seen what you might describe as a 'proper' correction? Well, it might be worth looking back to where all of this kicked off in the first place – the US. Say what you like about the current state of the market, but you can't deny that they've already suffered a significant 'correction'. In the US, house prices fell by about 33% from peak to trough, over the course of three years. And the fall has been far more extreme in the areas where the bubble hit worst. For example, in Las Vegas, house prices have fallen by 55% since the start of the slump.
There are plenty of reasons to remain concerned about the market. Home loan applications for purchases fell in November to their lowest level since 1997. Various government measures remain in place to keep the market propped up. There are tax credits, which will last until the end of April. And then there's the fact that government-backed home loan giants Fannie Mae and Freddie Mac, along with the Federal Reserve, have been buying up home-loan-backed-securities (MBSs), in order to keep rates low. This can't go on forever – indeed, the Federal Reserve is set to stop buying MBSs at the end of March, which could push rates higher.
With unemployment of around 10% (and that's by no means the most pessimistic view of US jobless figures), any jump in interest rates could force a lot more people to ditch their properties.
However, for all that, it's hard to argue that US house prices are overpriced at the moment. As the Economist notes, in the US, relative to rents, prices are now 3% below their long-run average, at least as measured by the S&P / Case-Shiller index. "At the peak of the bubble, they were 40% overvalued."
Now when markets have been massively overvalued, they don't usually just fall back to fair value then stop. They slump below fair value before they rebound. But if you buy an asset when it's at or below fair value, you can at least have some realistic hope that at some point in the future, it will be worth more than you bought it for. So as long as you can afford to be patient, and you aren't going to be forced out of your position, then 'buy and hold' becomes an investment strategy with a realistic chance of making you some money.
If you want to play property, look to the US
Now I'm not saying you should pile into the US housing market right now. But certainly if you're looking for a play on property, then I'd be more keen to investigate the US than to put money in the UK. And the good news is that you don't have to be looking at condos in Florida (although if you want to, you should check out this piece we ran earlier in the year from US columnist Steve Sjuggerud – It's a perfect time to buy a house or two in the US).
There are several cheap-looking US-listed stocks which own land banks that should benefit from a long-term recovery in the US property market. Regular MoneyWeek columnist Sven Lorenz looked at three cheap ways to play US land in the New Year issue of MoneyWeek magazine (if you're not already a subscriber you can claim your first three issues here).
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With the next year looking bleak for the UK economy sterling looks set for a bad year. So what can you buy to take advantage? Theo Casey tiops three stocks that should rise as the pound falls.
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