Wednesday, October 21, 2009

The Debts of the Spenders: UK Property Prices Almost Back To Mid-2008 levels

Almost. Prices are almost back to where they were during last year's property bubble. The catalyst of course is quantitative easing, the controversial policy tool that debases the underlying currency so as to increase liquidity flows and maintain artificially low interest rates.

In particular, COMMERCIAL property prices have experienced the strongest surges.
The Financial Times reports that London is the center of a demand led recovery. Rental growth remains strained and is the key to any sort of sustainable recovery.

A lot of foreign money is returning - not necessarily from Eastern Europe/Russia which saw outsized bids last year - but mostly from the cash rich Middle East Gulf states. London has long been the second home of the Arab diaspora. Savvy fund managers saw the writing on the wall and capitalized on this concentration of wealth to open Sharia or Islamic law compliant funds. Some of the recent property acquisitions are no doubt part and parcel of the recent uptick in Islamic finance again.

All is not well however as the structured finance component of the deal flows are still experiencing problems. Fitch ratings analysts believe that the UK government's ABS scheme will not be extended past tomorrow's deadline. The ABS program was notable because NO ONE used it.

The government designed the scheme to reopen the UK RMBS market by offering guarantees covering credit or extension risks at a cost of about 25 basis points over Libor plus the median five-year credit default swap spread on the issuer.

There has been no take-up, 'primarily because CDS swaps for banks have widened significantly since the start of the banking crisis, making the scheme's economic unworkable for more originators', Fitch said.

Widening spreads are a bad sign despite Fitch's attempt to put a positive spin on the story by saying there are market led solutions developing. It indicates a fundamental disconnect between buyers and sellers over valuations. In healthy times, the spreads would be narrower but now the wide spreads are telling me that sellers continue to hold onto a higher price for other reasons besides valuation, including the fear of taking a large write - off on their books. So, they just continue to sit on the asset and hope that the government's liquidity schemes will eventually lift all boats higher.

In the meantime, here is a nifty tool that will allow readers to see if a RESIDENTIAL property is underwater as measured by the loan to value (LTV)ratio. Numbers over 100 indicate negative equity.
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