UK property: got dollar?

For dollar rich Americans who have been lusting after property in Britain now is the time to buy. Two separate economic trends work in their favor. Over the last year, the pound has made a steep drop against the dollar and real estate prices in the UK have fallen sharply. These two market forces combined translate into a deep discount for Americans who want to buy in the UK...

Dropping real estate prices

Property prices in Britain have fallen by a record 17.7 per cent when compared to a year ago, according to the Halifax House Price Index's quarterly year on year figures.

"The average UK house price declined by 2.3 percent in February. This monthly decrease more than offset January's two per cent increase," said Martin Ellis, a Housing Expert at Halifax.

"Prices in the three months to February compared to the previous quarter, which provides a better indicator of the underlying trend, were 3.6 percent lower."

The rest of 2009 isn't looking too good either. A combination of economic ills threaten to further negatively affect the property market. Factors such as declining incomes, rising unemployment, financial markets in disarray, and lack of mortgage credit will most likely mean a difficult 2009 for the housing market, according to Halifax.

The average UK house now costs £160,327 ($235,857), down £34,626 ($50,938) from a year ago.

A weak pound

In addition to dropping prices in Britain, Americans have another advantage going for them when it comes to investing in UK real estate.

The British Pound has fallen in value giving foreign buyers an edge in the property market. Bargain hunting, cash rich Americans have taken a notice too, according to HiFX, an independent foreign currency exchange firm. 

"Inquires from Americans and Canadians looking for properties in the UK increased by 55 percent in January 2009 compared to the same period in 2008," it stated. The firm which offers foreign exchange services to both individuals and businesses also reported that interest in other, normally sought out places, such as France and Italy, either decreased or remained the same.  

The dollar now stands at about 0.69 British pounds, up by about 45 per cent since November of 2007 when it was just 0.48 pounds. This has translated into huge discounts for property investors jumping into the UK market with arm-loads of dollars.

Add to this the UK wide price falls in the real estate sector and you have a market ripe for picking.

"The slide in property prices in famous-name London areas such as Belgravia, Canary Wharf, Chelsea, Hampstead, Kensington, Knightsbridge, Fulham and St John's Wood is tempting over buyers from U.S. who know that much of London's high-end property now represents a 'bargain'", said Ward Naughton, the President of HiFX Inc, the North American arm of UK based HiFX PLC.

Big savings in a historically solid market

With the stock markets in turmoil, buying British bricks and mortar is a good way to go. People who are stuck with expensive mortgages are offloading their properties at bargain prices and then renting.

With tight credit markets curtailing mortgage approvals, the demand for rental properties will probably go up. This makes the British property market attractive to investors interested in buying real estate to generate rental income. 

The long term prospects of the UK real estate market looks good. "The demographics support future growth of the property market and potential capital gains for early investors. Price for property in the UK will always rise in the long term because of the fact that the UK is an island and is already crowded with a constantly growing population," said Naughton. "Each year the number of homes built is about 20,000 less than what is needed."

Just how big are the savings?  "Across the UK homes lost approximately 10 percent of their value in 2008 as Britain is mired in a deep economic downturn with rising unemployment and significant turmoil within its banking system," according to Naughton.

This combined with the strong dollar against the Sterling, "a buyer using U.S. dollars can purchase a London property for almost 40 per cent less than in November 2007." In simple terms, a home priced at £500,000 is now selling, on average, for about £450,000 because of the slow housing market.

This same home would have cost a buyer with U.S. dollars $1,041,666 in November 2007. Now, with property price falls and the dollar's rise, it can be bought for $642,857, conferring a saving of some $400,000 to the buyer.  

This window of opportunity will not always be there. "It reminds me of a similar opportunity that Canadians had early last year when they took advantage of the strong Canadian dollar, at parity with the US dollar, and invested in bargain priced properties in major foreclosure areas in the U.S.," said Naughton.

"The Sterling will not stay this low forever and depressed property prices in the UK will eventually recover."

Written by Yemisrach Kifle for www.nuwireinvestor.com

Picture by DCS-NI