February 08, 2006 584 VIEWS
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We are starting from this issue a Property Section. Our objective for introducing this section is to inform and educate our readers about issues relating to making property investment abroad e.g. in the UK and countries such as Spain, Cyprus, Bulgaria etc. We shall be looking, amongst others, at what factors to take into consideration as you decide to invest in these countries; how to avoid the pitfalls of making property investment abroad and how you can make reasonable return on your investment. The views and opinions expressed in this article and subsequent ones are those of this writer and do not in any way constitute an invitation to invest in any property. They are intended as general guidance only. Readers are strongly advised to seek independent legal, tax and financial advice before entering into any property contract. As a starting point, we would have a look at what happened in the UK housing market in the past year and what to expect in 2006 and beyond. 2005 - Rise in UK House Prices but still at 10-year low Figures recently released by Halifax (a major mortgage lender) showed that there was a modest recovery in house prices during the last quarter of 2005. House prices increased by 1% in the month of December and by 2.1% in the final quarter of that year. Overall, the annual percentage increase of 5.1% in house prices was recorded nationally in 2005; representing the smallest increase for 10 years and significantly below the long-term annual average of 8%. The recovery in the housing market is also confirmed in the recent housing market survey for December 2005 published by Royal Institution of Chartered Surveyors (RICS). The survey showed that house prices rose for the second consecutive month after fifteen months of falls. House prices increased by less than 10% in all the nine English regions for the first time since 1998 while the biggest increases were recorded in Scotland (14.8%) and Northern Ireland (14.1%). Prices in Greater London increased by 3.6% in the final quarter of 2005; representing the second successive quarterly rise in the capital, suggesting the beginning of a recovery following a fall between the third quarter of 2004 and second quarter of 2005. The average price in London broke through the £250,000 barrier for the first time in the fourth quarter to £257,120. Outlook for 2006 Increase in total employment and 3.6% rise in average earnings over the past year together with the Bank of England interest rate cut have contributed to the recent improvement in house prices. However with below trend economic growth predicted for 2006 and the continuing high level of house prices in relation to earnings, which should curb housing demand (by first time buyers – FTBs); a renewed bout of high price increases is not expected in 2006. The housing market is expected to be flat with modest nominal house price growth and no change in real terms. UK house prices are forecast to rise by 3% in line with the predicted rise in retail price inflation. With cut in interest rate likely in early 2006, the annual rate of house price inflation is expected to increase during the first half of 2006 potentially reaching a peak of 7 – 8% mid-year as modest price rises compare with slight falls in early 2005. The annual rate is subsequently expected to fall as prices rise at a significantly slower pace than in the second half of 2005. What Next After 2006 The longer term picture on house prices is less clear but the result of a research by UCB Home Loans (a subsidiary of Nationwide) showed that mortgage brokers expect property to outperform equities over the next five years. The research was conducted in December and January among 523 mortgage brokers. 55% of the brokers believed that people will be investing in property rather than shares in an attempt to make money over the next five years while the remaining 45% are of the view that people will invest in shares over the next five years. This is in spite of the figures released by Nationwide at the end of last month which showed that the FTSE 100 grew by 16% in 2005, compared to housing market growth of 3%. However the FTSE still remains 10% below its 1999 level whereas house prices are more than twice as high as they were at the end of 1999. Why Will People Continue to Investment in Property Individuals have different reasons for making property investment. We would discuss briefly 2 main reasons while in subsequent articles we would touch on the benefits of residential property investment or buy-to-let; as it is also known in the UK market. These two reasons are Capital Growth Over the long term property is considered as a safe asset which appreciates in value baring all unforeseen circumstances. Halifax House Price Index (December 2005) showed that the average value of UK property increased by more than 175% between the last quarter of 1995 and the last quarter of last year from £61,544 to £169,901. To benefit from appreciation in the value of your investment, we would advise that the prospective investor views property investment as a medium to long term investment. It really can be a very successful vehicle for capital appreciation if one chooses the right areas and properties. It is for this reason that many people invest in property purely for long term profit, hoping to make money on the rising value of their investment. Income Some people would like to make a tidy income from renting out property and will therefore invest in properties with good rental yields. In choosing this investment objective one must choose the right properties because failure to do so will cause the expected income eaten up by maintenance and repair costs, mortgage payments during void periods, refurbishment and other expenses. With the predicted growth in the UK population mainly from immigration in the face of shortages in the supply of new homes and with average house price/earning ratio at all time high of 5.5 more FTBs are expected to rent than buy. The demand for residential property is therefore set to continue with rental yields remaining relatively strong. Aside from these two objectives, one may want to invest in rental property for retirement planning, as an alternative to pension etc. However it is important that you are clear in your mind about your investment objectives and expectations because these factors have implications on the location, type of property to buy and target tenants. To assist you in your decision, we have categorised a prospective property investor into seven categories as explained below. You should be able to determine what type of property investor you are and be clear in your mind why you are making the investment because experience has shown that property investment is a serious business proposition for which the investor must have clearly set objectives so as to be successful. Until next week. What Type of Property Investor Are You? - see the moneywise weekly newsletter for the table.
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