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Property markets in Australia, United Kingdom and United States of America have enjoyed mixed fortunes over the last 12 months. Whilst virtually every market was affected by the financial crisis, the Australian market has recovered more strongly than most others, including UK and USA. The question investors have to ask is whether now is the time to invest in these markets.
The central London residential market has long been a favourite of international investors. It has started recovering from the dark days of the financial crisis and prices increased by 10% over the last twelve months. However, they are still over 10% below the peak of 2007. Mortgages have become more freely available and demand has increased, particularly from overseas buyers who are benefitting from the current weakness of the Sterling. Most agents are complaining over a shortage of stock, which is a direct result of the inability of developers to secure finance to undertake new developments. This has helped drive up prices and kept rental demand strong, with gross yields at around 5%. With mortgages at less than 4% and interest rates likely to remain low, the risk of prices falling seems limited.
There will be some minor dips in the road ahead and growth may be limited over the traditionally quiet summer months. Additionally, the new coalition government is now in place and UK residents may face a higher capital gains tax on investment properties. However, given its international appeal, the strength of its financial/business district and no capital gains tax policy for overseas residents, this should not adversely affect the central London market over the medium term. It will remain a sound place for overseas investors seeking security and attractive returns.
The Sydney and Melbourne residential markets have been stellar performers over the past year. The Sydney median price reached $609,300 in March 2010, which is 14.7% higher than a year ago. This is the highest annual growth since the end of the last boom in early 2004 and is the first time the median price has jumped above $600,000. The Melbourne market performed even more strongly with the median price jumping to $549,980, an annual growth of 27%. This is the highest increase since 1995 and has resulted in commentators warning that property prices in some areas are overheated and are unlikely to be sustained.
One thing that is likely to hold back Australian property markets is interest rates. Australia’s cash rate in April 2009 was 3% and since then there have been 6 increases of 0.25% taking the current rate to 4.5%. Mortgages are now much more expensive and this will inevitably slow the market down, particularly in the lower and middle price brackets. Interest rates are likely to stay high for some time and many commentators feel that a period of price stability is likely to occur. High interest rates have also impacted on the Australian dollar, which is now trading at historical highs to many currencies. If you are holding Australian dollars and are prepared to take a medium term view then the Australian market may appeal to you. The currency risk is a very real one for those who have to buy Australian dollars to invest there. You will need to time your exit so that any gain from an increase in property values is not negated by a fall in the currency.
The USA market shows mixed signs of recovery. Whilst there are signs that house building is increasing, there are still worries that another round of foreclosures could hit the market. There is no firm evidence of house prices increasing, although large ’vulture’ funds, which seek to buy distressed and foreclosure properties, are apparently entering the market which indicates we are near the bottom of the market. Investors can now buy properties at below replacement cost and when the market recovers, as it inevitably will, the returns should be extremely attractive. If the fragile recovery in the economy continues this may recover sooner rather than later. However, this is almost impossible to predict and investors entering this market should be prepared to exercise patience until it does. – St. David Property
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