London, SA's favourite foreign residential property investment market, is finally coming to the end of its decade-long boom. UK property prices have fallen for three consecutive months for the first time since 1995.
Respected economists Capital Economics have forecast a 3%/ year drop for 2008 and 2009: "With buyer inquiries having fallen every month this year, mortgage demand significantly weaker and affordability seriously strained (see graphs), the chances are the downward trend in house prices will continue.
"The bottom line is that evidence of a housing market correction is mounting rapidly. Given the 2,3% fall over the past three months, our 3% year-on-year forecast for 2008 is beginning to look too conservative."
Estate agents Knight Frank are positive, saying London prices will rise 10% in 2008. But property researchers Rightmove says asking prices fell 6,8% in November, a sign of much worse to come.
But Nadeem Walayat, editor of Market Oracle, predicts UK prices will plunge 15% over the next two years, with London dropping by 25%. This could mean a fall of about £85 000 from the average London house price of £378 000.
Says Walayat: "UK interest rates should be cut as the UK housing market declines, targeting a rate of 5% for the second half of 2008. The implications are that the UK economy is heading for sharply lower growth in 2008."
One of the main reasons for Walayat's gloom is that buy-to-let investors could dump their properties from April 1, when capital gains tax falls from 40% to 18%.
"Buy-to-lets typically produce gross yields before costs of between 3% and 5% of current value, and therefore now present a poor investment compared with the situation barely four years ago," says Walayat. He expects an avalanche of selling from these investors to lock in profits.
"This also means that the market will to some degree be artificially supported going into April 2008," continues Walayat. But he argues it will not be enough to prevent a wider decline in UK house prices.
Capital Economics' Ed Stansfield says a further signal comes from the 45% fall over six months in the shares of listed house builders. "Three major downturns in the UK housing market have all been preceded by a collapse in house builders' share prices," he says. "Falls on the current scale and time horizon have previously been seen three times in the past 40 years. Falling house prices were a common link between those episodes."
It's unlikely that South Africans will be dumping their London properties. Mostly they are secondary properties and long-term investments, often for their own use or for children studying in the UK. In fact, there are two ways the downturn could actually boost their investments.
First, interest rates are likely to fall through 2008, reducing loan repayments. Second, rents always rise faster when prices fall.
London remains probably the best long-term residential investment market in the world. A 25% fall and careful timing before buying could mean a rare buying opportunity.
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