Dive into transatlantic pool to fish out a second home bargain
Ellen Kelleher, Financial Times 8 December 2006
Ellen Kelleher
If you’ve been weighing up whether to buy that second home in Florida, now might be the time to go on a spending spree across the pond. Falling property prices in many US hotspots combined with a weakening dollar mean that Brits may be able to snap up a bargain.
An oceanfront flat with one bedroom in haughty Palm Beach, Florida can be had for well under £100,000 ($179,000 to be precise), according to www.realtor.com, a listing site for US estate agents. More interested in a pied-à-terre in Manhattan for occasional shopping trips, perhaps? The prices for studio apartments in upmarket buildings on the East side with an elevator and a doorman range from $300,000 to around the $450,000 mark for somewhere reasonably swanky – considerably less than their equivalents in upmarket London areas such as Kensington and Chelsea.
The combination of the correction in the prices of US residential properties and the dollar’s fall against the pound to its lowest level for more than 14 years is manna from heaven for British investors. Even in the most expensive cities in the US, your pound goes a long way, given that the current rate of exchange is around $1.96 to the pound.
“It’s a joke in the office that with the falling dollar, British pensioners are buying office buildings and US pensioners are finding it increasingly hard to get a house on the beach,” says Ward Caswell, a research director at CB Richard Ellis, the property investment group.
The signs of a cooling in property prices are clear. The bull run in property prices over the past few years in hotspot areas such as San Francisco, Manhattan, Los Angeles and Boston is over, for the moment at least. Rising US interest rates and a slowdown in the US economy are discouraging cautious Americans from signing up for new mortgages, economists say.
While US house prices rose again in the third quarter, the rate of quarterly appreciation – 0.9 per cent – was the lowest it has been in eight years, said the Office of Federal Housing Enterprise Oversight (OFHEO). In the most telling sign to date of a correction, the price of houses in four states with particularly robust and expensive markets – New York, Rhode Island, New Hampshire and Massachusetts – actually dropped in the third quarter.
“The housing market is in a decidedly different stage,” says James Lockhart, director of OFHEO. “The slowdown is not unexpected. There are still some areas where appreciation rates remain very high but now they are the exception rather than the norm.”
While some economists think the housing market will show signs of recovery as early as the second half of next year, the current stuttering in prices means the balance of power has shifted from sellers to buyers in most US states. “It’s definitely a buyer’s market,” says Richard Ellis’s Caswell.
So if you are interested in ploughing your hard-earned cash into Uncle Sam’s vast property empire, where should you put it? If you want a proven investment, analysts say you should stick to the dictum that house prices in the US tend to remain “strongest for longest” along the East and West coasts. This is particularly true in areas such as southern California, the pacific Northwest, San Francisco, New York and the stretch from Boston to Maine.
“With the depression in prices, now is a good time to buy along the coasts,” says David Ingram, senior economist at Torto Wheaton, the research arm of CB Richard Ellis.
If you are looking to buy a house or flat in the US purely as an investment, however, you might want to avoid the country’s most expensive neighbourhoods such as the Hollywood Hills, the Upper West Side in Manhattan or the Mission district of San Francisco. Instead, look to more up-and-coming areas.
The hottest and most lucrative states at the moment are Washington, Oregon, Utah, Idaho, Florida, Wyoming and Montana, according to Patrick Lawler, chief economist at OFHEO. Faced with high property values and steep living costs, Californians have been moving north and east to these states on the hunt for value in the housing market, he explains. In Idaho, the average property price was 17.5 per cent higher in the third quarter than it was the previous year and in Oregon it was 16.9 per cent higher, according to OFHEO.
In Florida, cities with younger populations such as Miami, Orlando and Tallahassee are also seeing a rise in property prices as they have benefited from a surge in immigration and rising wages.
At the moment, the weakest property markets are the traditionally expensive ones. In Boston, for example, property prices are flat to declining and the same is true in New York, according to OFHEO. Also, the “googlisation” effect appears to have worn off in California’s prosperous Silicon Valley, and even internet entrepreneurs are flocking to less desirable surrounding areas in order to save money on house prices. “The number of cash-rich investors willing to put money into San Francisco’s real estate market has peaked,” says John Kelly, head of client investment at Abbey.
Analysts expect the dollar will remain weak for at least two months as hedge funds, which bear much responsibility for the fall in its value, are likely to continue to sell the greenback. But some economists argue that exchange rates could fluctuate from January so if you are considering a purchase, you could benefit by locking in a rate sooner rather than later. “These are fantastic rates, the best since 1992. It’s best to take advantage of them while you can,” says Bob Munro, chief economist at HiFX, the currency exchange broker.
There are two ways to lock in current exchange rates, analysts say. The first is a spot contract where your money is moved in a lump sum at one time and a spot rate is established over the phone with a currency broker who will then transfer the funds into a dollar account within a few days.
The second is to take out a forward contract or to set an established rate with a broker, put down a deposit on the money to be transferred of, say, 10 per cent and then meet a series of payments as part of the contract.
If you take out a mortgage in US dollars, some companies offer plans that help you finance it by forwarding money from a dollar account to the lender. Some of the most competitive currency exchange brokers in the UK include HiFX, TTT Moneycorp, Currencies Direct and Currencies4Less.
But, while some are quite bullish on the prospects for the US housing market, others are cautious when it comes to advising British investors to put money into it, particularly if they are looking for a short-term investment. They argue that the housing market has yet to hit its trough.
“You have to be very careful about making the currency argument,” argues Kelly of Abbey. “The bull market has gone on for several years, but we haven’t seen the emotional or sentimental impact of the climbdown in the housing market yet.”