Money Morning Interesting

[Johnny Cash]

It seems you can’t go wrong with property.

Global equity markets are having a torrid time of it this year. First stock markets in the Gulf and Iceland started to collapse, and last month the malaise spread to developed markets across the globe.

But commercial property has continued to attract investors, while the residential property market has seen something of a mini-revival since the start of this year – centred mainly in London.

So where’s all the money coming from?

Well, a couple of recent reports have revealed who’s propping up the UK’s over-inflated property markets – and it’s not good news…A study of commercial property by Professor Colin Lizieri and Nina Kutsch of Reading University has found that a full 45% of the City is now in foreign hands, compared with 20% in 1995.

Outstanding debt stands at around £138bn – that’s three times the peak that preceded the last property crash at the start of the 1990s. “Much of today’s investment activity seems focused on short-term gains with less regard for risk,” the report says.

Michael Marx of property management company Development Securities, which commissioned the report, told the Independent that “ the City had seen the unusual phenomenon of prices that had risen sharply, without an increase in demand from occupiers.”

There’s a name for the ‘unusual phenomenon’ of prices soaring in the absence of demand. It’s called 'a bubble'.

As Professor Lizieri puts out: “The new ownership structures in the City make it very vulnerable to shocks.” Rising interest rates and diving stock markets might just be classed as the type of nasty shock that could see overseas investors running to cash in their gains.

And the bad news for residential property bulls is that it’s not just the commercial property market that’s relying on wealthy foreigners with no regard for their money – it’s residential house prices too.

Upmarket estate agency Knight Frank says prime central London homes have risen in price by an average of 16.6% since the start of this year.

So who’s been fuelling this demand? Ian Springett at online estate agent primelocation.com elaborates. “The influx of foreign money continues to focus on the most exclusive properties in London, with money from Russia, China, India and, more recently, a surge in demand from Brazilian buyers, snapping up the best properties London has to offer.”

That goes some way to explaining the huge disparity between house prices and UK wages - because it’s not UK wages that are being used to fuel the property bubble.

Like every other faintly desirable asset on the planet, the price of UK properties has been sent soaring by the cheap money sloshing around the globe.

But now the cheap money is drying up, it’ll take its toll on the property market, just as it has on equity markets.

We may already be seeing the first signs of waning interest - according to Knight Frank, the big-money buyers are drying up.

The Independent reports: “A switch in demand from £4m plus homes towards the £1m to £2m price bracket could signal the 'beginning of the end' for the boom in London prices.”

Knight Frank’s Liam Bailey adds: “The prime areas of London are one of the first lead indicators of a housing market downturn or upturn in the UK. This possibly signals the end of the very hot period we have just experienced and we believe price growth in prime central London will begin to slow through 2006.”

Meanwhile, the latest Nationwide figures show that in May, house prices rose 0.2%, while the annual rate of house price inflation fell from 4.8% to 4.7%. New buyer enquiries are tailing off while the number of “For Sale” signs is rising.

“Together these point to some loosening in the market over the coming months as supply rises relative to demand,” said Fionnuala Earley, Nationwide’s group economist.

Bank of England statistics back up the case for a slowdown. In April, the number of new mortgages approved for house purchase fell to 106,000, from 114,000 in March. The figure was below most analysts’ expectations, and the lowest in seven months.

And the Confederation of British Industry’s latest survey of retail sales also suggested that housing is set to return to the doldrums. It showed that although sales ticked higher in May, this was mainly driven by demand for World Cup-related goods. (You can read more on why the World Cup will distort retail sales for the next few months here: Why the World Cup won’t save retailers (http://www.moneyweek.com/file/13167)). Sales of furniture, carpets and DIY equipment - sectors that should do well when the housing market is healthy - continued to fall.

And there was further bad news - employment on the high street fell at its fastest rate since the CBI survey began, 23 years ago. Rising unemployment is not a recipe for continued house price growth.

The house price crash may have been delayed – but it’s just around the corner.