Global property prices

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The past decade has seen housing booms in the US, where property prices almost doubled between 1996 and 2006 in real terms, and soaring values in the UK, Spain, Ireland, central Europe and beyond.

Liam Bailey, head of residential research at Knight Frank, will tackle your questions on the global housing market in a live debate on Monday October 8 from 2-3pm BST. Mr Bailey has substantial experience across the whole residential sector, from development and private housing to investment and affordable tenures.

So will the housing market slow down in response to tightening credit conditions? Are we heading for a global house price recession or a soft landing? Mr Bailey answers your questions.


Do you agree that the “lack of supply will continue to support house prices” argument is true only as long as demand does not drop faster than supply? Isn’t a consequence of Northern Rock exactly that, supply is dropping like the proverbial Rock?
Michael Mol, Oxford

Liam Bailey: The fact is that in the UK we have seen and are forecast to see, the formation of new households race well ahead of the supply of new housing. Every time the DCLG revise their house building targets, they tend to be catching up with the satiation on the ground.

Barring a sudden change in UK or EU law regarding migration patterns - the UK is set to fall well behind target in terms of the provision of housing - especially in the southern half of the country.


I’m surprised so many commentators seem to think the decline in house prices in many countries is bottomless. Surely, even in overheated markets such as California and Florida, houses are highly desirable items. There is a limit to how low they can go even if distressed selling pulls prices lower in the short term. When should we start buying?
David Carte, Johannesburg

Liam Bailey: You are right to infer that markets generally over react on the way up and the way down. My view is that there will be many good solid areas of the US market which will suffer from the sub-prime fall out and will represent good value during 2008.

The same thing happened here in the 1990s with the early investors reaping strong rewards. The lack of a significant trigger in the UK, leading to a large slide in prices; means that we are likely to see investors looking for value coming into the market very early - ie looking to buy even with minimal price falls.


Can we trust anyone with even a slight vested interest – including you - in the property market to help deflate the bubble. All the decision makers have a vested interest in house prices going up and up, further out of reach for the first time buyer.
Rob Storr, Cardiff (Moved here because couldn’t afford a house in the South East)

Liam Bailey: I can understand your sentiment, however I would disagree to the extent that like many commentators I am free to ”tell it as it is”. I would also say that the last thing anyone with an interest in the housing market wants is a price bubble.

Due to the uncertainty caused by the recent credit crunch following strong market growth we are likely to see deals volumes in 2008 down by 10 per cent to 15 per cent compared to this year - a poor result for all estate agents. The dream scenario for all concerned would be price growth in line with earnings inflation and 100,000 transactions a month - no booms or busts - but even all the commentators in the world can’t make this happen.


Estate agents and lenders say that house prices will plateau for the next few years. Can you please give some historical examples where any asset that has boomed in price over 10 years has then plateaued?
Anil Vasisht, Bexleyheath

Liam Bailey: Unfortunately historic data on the housing market only takes us back to the 1970s with any certainty - the early 1970s and early 1990s bubbles and crashes were both occasioned by rapidly high financing costs and in the 1990s case by a severe economic recession.

We have never really seen the current situation before - hence the rather positive forecasts for what happens next. The limited historical evidence suggests that we will need a sharp rise in the costs of borrowing or that we will need a sharp contraction of economic activity to lead to a real price correction. With neither of those two apparently on the cards we seem to be in something of uncharted territory.


With rental yields now significantly lower than the cost of borrowing, there can be no doubt that over the long term, one of two conclusions will follow: rents up or property prices down. Hypothesising that the bulls are right, what evidence is there that rental income will increase? Will this constitute a break from the long tested correlation with salaries?
Jon Tippell, London

Liam Bailey: The investment sector in UK residential has always been a total return play rather than an income play. That said, whereas investors were much more interested in capital growth until recently, they are now looking to the sustainability of rents much more closely.

I believe that rents will rise ahead of wage inflation for some time, they have lagged over recent years and there is scope for further growth. In central London for example - rents peaked in 2001, fell back by 15 per cent by 2003 and only by June this year did they recover all of the ground they lost - we expect rental prices to outpace capital growth in London over the next two years at least.


Do you think that a balance between the income/house price ratio will be restored in the next few years, and houses and flats will again become affordable to ordinary people on average salaries or do you think there will be a permanent change in the percentage of the population who own their own home?
Cathy White, Hertfordshire

Liam Bailey: I don’t think that the price / earnings ratio will worsen over time, most elements of the UK market are now pretty fully priced and there is little scope for price growth much above earnings inflation. However I don’t believe that the the situation will reverse - as it did during the early 1990s crash. Without a trigger - such as significantly higher interest rates or a large scale economic downturn I can not see a scenario where prices will fall back significantly in the UK.

In terms of home ownership - there is a wider political debate about the ”ideal” level of owner occupation - a too high level can impact on labour market flexibility etc. In the UK despite a rapid growth in the size of the buy to let market, we still have a relatively small private rented sector and I think this sector is likely to expand over future years as investors retain their position in the new homes sector.


Rics recently predicted a 50 per cent increase in central London residential property prices over the next five years. Do you agree with this forecast?
Gregor McGregor, Hong Kong

Liam Bailey: This growth is not unrealistic: over the past 20 years according to the Knight Frank Prime Central London Index prices have risen on average by 13.6 per cent annually. The Rics forecast you refer to would suggest an annual rate of between 8 per cent and 9 per cent. This is slightly higher than we have placed our forecast (7 per cent) but is not unrealistic.

Whilst we are starting at a high base in terms of pricing - London’s economy and the shift of gravity from European and US financial centres to London is clearly a cause for optimism for the housing market over the next few years.


Is it time to cut any loses, sell all my property investments and take a small hit, but move into the gold market where prices are increasing a lot?
Martin Jones, London

Liam Bailey: Ignoring the need to understand your motivations and the nature of your portfolio - your comment seems to suggest that gold or an alternative investment would offer a safe haven away from the property market. The classic investment advice is still relevant - prices can rise as well as fall. There is no way of telling now whether buying into a steeply rising market just because it is rising is like buying into the US housing market two years ago.


I have read that from August 2007 the central banks have been restricting credit. Since our financial system requires exponential growth, a restriction of credit will cause severe problems. Do you or do you not agree that the biggest problem we face is that privately owned central banks are allowed to manipulate the world’s financial system?
Richard, London

Liam Bailey: No, I would take the opposite view. The US, UK and eurozone central banks have all tried, with varying degrees of success, to aid the financial system rather than hinder it. The willingness of central bankers to step into the market during its recent turbulence would seem to suggest a clear desire to act in difficult circumstances to underpin both confidence and activity.


We are told by the media here in Queensland, that property prices will go up by 40 per cent in the next two years. Do you see that happening?
James A Lamb, Queensland Australia

Liam Bailey: No. The average price growth in Australia has fluctuated around 8-9 per cent over the last year, and while growth in the Queensland capital Brisbane has been the highest of Australian cities with 15.7 per cent growth (year on year) to Q2 2007, and despite a slowdown in residential construction rates, growth would have to accelerate for 40 per cent house price inflation to be reached.

Price inflation on the Gold Coast and Sunshine Coast has tended to follow that of Brisbane, and while demand remains strong for residential property in these areas, boosted by strong economic performance and earnings growth, 40 per cent looks a little optimistic.


It appears as it the housing market in Spain, Sevilla in particular, has not seen a big drop in prices but it now takes much longer to sell. If you were to sell a flat in Spain with the intention of converting your euros to dollars, do you think it is best to drop the price for a quick sale or maintain a fair price with the expectation that the dollar will continue to weaken?
Tim Devereaux, Seville, Spain

The market in parts of Spain appears to be in some difficulty, with some areas including Andalucía having seen the closure of around 40 per cent of real estate agents.

In Sevilla, year on year price growth was down to 24 per cent to June 2007. However, in other areas, price growth has continued - Barcelona saw 6.2 per cent growth in the six months to June 2007 (10.3 per cent year on year growth), Girona saw 5.8 per cent over the same period (12.7 per cent year on year) and Valencia 6.5 per cent (13.5 per cent year on year).

Growth in the capital has been more subdued, with 5 per cent growth (year on year to June). Marketing times for property vary enormously, with some coastal areas seeing marketing times in the region of 18 months to two years. So it depends where the property is.


Given that the Netherlands has not had a house price crash since the 1970s and seems to have managed to stave off any significant falls since the introduction of the euro through prudent and timely release of building land, do you think that the Dutch housing market will continue to stagnate or fall?
Nicholas Lambert, Netherlands

Liam Bailey: The housing market in the Netherlands has seen steady growth over the last year, with year on year growth rates of just under 4 per cent. Growth rates have slowed, notably down from the 8 per cent year on year growth seen to Q1 2007. However, there is no sign of price falls yet in the national average price of houses. Mortgage indebtedness in the Netherlands is high in comparison with many European countries so higher interest rates will have an impact on the Netherlands housing market.

New housing construction has been falling in the Netherlands, so the tightening of supply may improve the prospect of continued growth in residential property prices. New units constructed during Q2 2007 were 10 per cent lower than the same period a year earlier. Perhaps more significantly, the number of new construction permits approved in Q2 was almost 30 per cent lower than the corresponding period a year earlier. The strength in the economy with falling unemployment rates in the Netherlands, and continued demand for new homes in a period where supply is reducing should mean that the residential property market will continue to see price growth in the short term.


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