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  • Writer's pictureJames Hartland

UK House Prices Fall at Fastest Rate Since 2009: What does this mean for overseas buyers and expats?

Updated: Sep 28, 2023

UK Luxury Flats

Headlines like this are likely to shock overseas investors and expat investors who are invested in UK property. Although property is generally a far more stable investment than equities or funds it can also go through significant peaks and troughs.

For the International Investor it is highly likely that the drop in prices will not be as significant as for the UK investor. The reasons are that as an International Investor, you will have rented out your property and your disposable income is likely to be higher than the average person in the UK.

Before inflation started to pick up for over a decade the UK has seen historically low interest rates. This means that for the investor with a mortgage a few years back after the mortgage costs were deducted from the rent they would likely be seeing a good profit.

Rising interest rates have completely changed this situation and meant that now and going forward the mortgage cost will likely be significantly higher than the rent.

As UK buyers struggle to afford mortgages due to rising interest rates, house prices fell by 0.2 percent month-on-month in July to reach £260,828 on average and this trend may continue for a long time.

It is also reported that households on fixed-rate mortgages set to come to an end in 2023 still face paying thousands more every year for new long-term deals. These issues will put further downward pressure on the housing market in the UK.

According to the latest data, a household with a two-year fixed deal for a mortgage of £200,000 will face an annual rise of around £5,570 a year if they switch to a new two-year deal when their current agreement ends. For many UK buyers, this will not be sustainable.

Another factor likely to affect the International/Overseas investor is that if they do have a mortgage they are likely to have paid a far higher deposit than their counterparts in the UK. The benefit here is that their mortgage payments will be lower due to the higher deposit and the equity they have in the property is more significant.

The worry is that if rates remain high which they are predicted to do, more UK buyers will not be able to afford their mortgage payments putting further downward pressure on the property market. For UK buyers who put down a 10% deposit, it is likely that many will already be in ‘negative equity’. This means if they sell they will not get the deposit back they invested and potentially if the market continues to fall the sale price may not even pay back the mortgage.

The UK property market has experienced these kinds of situations before and it is very likely this will happen again now. In the past, those who have got into negative equity have ended up walking away from their properties leaving the banks with significant property portfolios which are all in debt.

While negative equity is a worrying scenario and will further cause property values to fall generally these situations don’t last long especially if interest rates start to fall in the UK reducing mortgage costs.

An example of the issues facing new buyers is highlighted in the following. “A prospective buyer, earning the average wage and looking to buy the typical first-time buyer property with a 20 percent deposit, would see monthly mortgage payments account for 43 percent of their take-home pay (assuming a 6 percent mortgage rate).

“This is up from 32 percent a year ago and well above the long-run average of 29 percent.

“Moreover, deposit requirements continue to present a high hurdle – with a 10 percent deposit equivalent to 55 percent of gross annual average income.”

Jonathan Gordon, director of international real estate specialists, IP Global, said a continued decrease in house prices is “on the cards” due to high interest rates putting affordability “under immense pressure”.

But he said “a house price correction is more likely than a collapse” as the slowing down of the domestic market was partly offset by increased demand from overseas investors.

He added that prices will be supported by the limited supply of property in the UK and the backlog on construction due to a variety of factors including Brexit, Covid-19 and political upheaval in Eastern Europe driving up costs and causing supply chain issues.

For the International Investor sitting on UK property it may just be a question of riding out the ‘storm’. A weak pound will also cushion the increased mortgage costs for those earning in US Dollars which will make the mortgage far more affordable.

As the banks also come under pressure with customers defaulting on their mortgages there will be options to get a ‘better deal’. Banks are likely to consider allowing customers to move from capital and interest to interest only if they are struggling to make payments. It is also worth negotiating the rate with the bank especially if you have a perfect credit history of paying the mortgage.

For the International Investor the next few years for the UK property market look pretty negative although this will be balanced still by a strong rental market. The rental market will support the property market but the reality is that mortgage affordability will cause many customers in the UK to default on their mortgage payments which will have a significant effect on property values.

In the past many people have taken advantage of any correction in the UK property market to either buy or add to their UK property portfolio. For the longer-term investor who is UK focused this could be an option but it is likely that if you wait prices will fall further.

Structural changes in the laws in the UK with regards to UK property and how this is now taxed especially for International investors has changed the perception of the UK property market for the International investor. Brexit has been a huge negative game changer for the International Investor as this has again prompted International Investors to change their view of the UK as a place to do business and invest in a negative way.

As the months and years tick away the negativity around Brexit for the International observer only becomes more obvious and means that the UK property market and the UK in general look less attractive.

Covid and the war in Europe are also a worry for property investors and new property markets have sprung up as a result of this. The UAE is a market that currently has a strong appeal for International Investors as do certain countries in Asia.

As the property market deteriorates in the UK if you are an investor, make sure you have the best deal in terms of your mortgage and the rent you collect. Now is a time to review your investments in UK property and make sure it is aligned with your long term financial goal.

Feel free to reach out to us at Astra if you need help reviewing property investments you have and to make sure you are getting the optimum from them.

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