UK Home Prices May Decline In '08: Citigroup

Source : The Business Times, November 13, 2007

(LONDON) UK house prices may fall next year as a 'toxic mix' of higher interest rates, overvaluation and record debt deters property investors, Citigroup Inc said.

Downturn: Citigroup said house prices may also fall as the government's decision to cut capital gains tax encourages owners to sell

'We suspect that the number of buy-to-let home purchases will fall outright in 2008, hence contributing to a sharp drop in overall housing turnover' and a price decline of between one per cent and 2 per cent, said Michael Saunders, chief western European economist at Citigroup, in an e-mailed note. 'There is a sizeable risk that the outturn will be worse.'

The UK's housing boom has been driven in recent years by so-called buy-to- let investors, who purchase properties to rent them to tenants, Citigroup says.

With rental yields declining and buy-to-let mortgage lenders finding it more expensive to raise funding in the money markets, house prices may lose that prop.

The number of new buy-to-let mortgages, which have more than doubled since 2002, may drop 45 per cent in 2008, Citigroup says.

Loans for first-time buyers have dropped 31 per cent in the past five years and may be little changed next year, the bank said.

Britons are shouldering a record £1.4 trillion (S$4.2 trillion) in debt and trying to cope with five interest-rate increases in a year from the Bank of England.

The US sub-prime mortgage slump has also pushed mortgage rates higher, further hurting affordability.

Citigroup said house prices may also fall as the government's decision to cut capital gains tax encourages owners to sell.

The new levy came into effect in April and will lower the tax on second-home sales to 18 per cent from as much as 40 per cent.

'Buy-to-let investors may be tempted to sell soon in case the government, as it often does, reverses the tax change in a year or two,' said Mr Saunders.

UK house prices, which have tripled in the past decade, are already showing signs of falling. Values dropped for a second month in October, the first back-to-back decline since May 2005, mortgage lender HBOS Plc said last week.

Higher prices have made it harder for investors to profit from letting out their properties.

Rental yields on houses and apartments are now about 5 per cent, says Citigroup, which compares with the 6.37 per cent average rate offered by lenders this month on a two-year mortgage for 95 per cent of the property price. - Bloomberg