What is happening to house prices in Central London?

There has been a fair bit of news on the UK housing market in the last 24 hours and some of it has struck rather close to home for me anyway. Last summer I reported that there were signs of trouble in the developments at Nine Elms which for those unaware of the geography is just south of the river Thames between Battersea and Vauxhall. It is an area which is a large building site as it is being redeveloped wholesale and will include the new site for the American embassy. It extends at one end to Battersea Power Station where recently there have been ch-ch-changes too.

Battersea Power Station

This morning City-Am has reported this.

More than 50 luxury flats on sale at London’s iconic Battersea Power Station have had their prices slashed since January, with some seeing discounts as large as 38 per cent in a sign that wealthy foreign investors are scrambling to desert the scheme.

There is more than a little hyperbole in that quote so let us examine the basis on which these claims are being made.

Property firm Propcision has found that 197 properties have been listed for resale by the developer’s in-house agency, Battersea Power Station Estates, since last year. Around half the properties have had a price reduction at some point since the start of the listing with 76 of those units being reduced since the third quarter of last year.

This adds to the mood music created by the London Evening Standard earlier this week.

How worried should investors be at the wobbles in Battersea’s luxury flats market? For the FTSE 100 property boss discussing the matter over his turbot the other day, very.

 

So concerned was he at the speculative bubble inflated by off-plan buyers in the sky above the Thames that it was reminding him of the monster crash of the early Nineties.

In particular, he remembered the de luxe Point West development in Cromwell Road, which went bust, unfinished, in 1990, triggering a flurry of other luxury failures.

There is a symbolism here as for those too young to remember or indeed abroad the early 1990s saw something which will chill every central banker to their spine which is sustained house price falls in both London and the wider UK. Or to put it in musical terms “The Only Way Is Up” by Yazz was replaced on the turntables by “I keep on fallin'” by Alicia Keys.

There is much to consider here because if I take off my local residents hat there are two powerful economic forces at play. Before I completely take off my local residents hat Battersea Power Station looks very impressive and indeed stunning from the other side of the Thames and is an enormous site. Of course Pink Floyd got their long ago when they flew a pig above it for an album cover.

Currency Wars

As so much of central London property has gone to foreign buyers the issue of exchange rates is as important as house prices and indeed can be more important. If we consider the case of Chelsea then the number of Russians moving in has led to it receiving the nickname of Chelski! However we learn a lot about the current state of play from the exchange rate. You see up until early 2013 less than 50 Roubles invariably bought you a UK Pound, whereas even after the recent dip it now takes 103. So if you are a Russian then the price of a property in the UK has doubled in your currency. This has two consequences, new buyers have to dig a lot deeper into their wallets or purses whereas existing buyers are in a large profit should they take the money home. Some must be tempted.

If we move to Battersea Power Station then many of the buyers were from Malaysia. here too there have been currency swings. In early 2013 some 4.7 Malaysian Ringits bought a UK Pound whereas in the autumn of 2015 it took 6.6. Since then there has been another swing as it has dropped to 5.8. This leaves us with two main scenarios.

  1. Some may want to book profits which may look worth taking in a volatile world for both property prices and exchange-rates, especially as both no longer look one-way.
  2. Some will have only paid a deposit and may now therefore have face of be facing losses. In their own currency the property is now much more expensive and they want to move on. They may also be facing losses on the property itself.

My London Homes Kuala Lumpur has offered its view on Twitter.

Price reductions/corrections happen regularly with new build schemes as owners speculate. No need to panic!!

Perhaps more global tours and parties are required.

Battersea Power Station is embarking on a worldwide tour in October and November 2014 to 13 cities in 11 countries….. From Friday 31 October, representatives from the shareholders and BPSDC will host exhibitions in London, Kuala Lumpur, New York, Dubai, Paris, Los Angeles, Milan, Tokyo, Beijing, Singapore, Hong Kong, Shanghai and Doha.

I doubt whether Kate Beckinsale comes cheap although to be fair she did look stunning in the pictures.

Another factor in the equation is the way that more countries are imposing currency controls or tightening what they have. Thus for those who wish to buy in London it may not be as easy as it was.

What about Help To Buy?

That does not apply right now to most places in the Power Station area as (h/t @econhedge ) the system for loans has a limit of £600,000 and the prices are too high for that. Of course it does offer a type of back stop at lower levels. However the 89 price reductions listed by Propcision since January do now include some below the limit although not this one.

Comment

What we are seeing is a consequence of two factors. Firstly some of the trends which favoured the UK have faded and the volatility of world markets especially emerging market ones is having an impact. If you like it is a consequence of the currency war concept. Also as prices have risen in both UK Pounds and the currencies of many overseas buyers many may simply have been priced out. Some “punters” may have singed fingers if they only paid a deposit.

Others may well turn up and there is a base provided by the Help To Buy schemes but that is a long way below quite a few of the prices!  If we now widen the issue we see that  central London is no longer driving prices higher in the surrounding area and some of it has as a minimum indigestion and price falls. How will our establishment respond? As after all economic policy is already heavily weighted towards the housing market and the banks. The Bank of England Underground Blog confessed this only this morning.

That means the effect of QE2 on asset prices was still notable, for example, we estimate the extension led to a 5% depreciation of the euro against the dollar anda 6% increase in equity prices.

CPIH

The UK establishment has long tried to ram this down our throats so well done to the UK Statistics Authority. I was particularly pleased to see it echo two of my points.

  • ONS needs to take more time to strengthen its quality assurance of its private rents data sources, in order to provide reassurance to users about the quality of the CPIH.
  • There is some disagreement among users about the concepts and methods that ONS uses to measure Owner Occupiers’ Housing costs within the CPIH. ONS needs to do more to explain and articulate its own judgements about the concepts and methods that it uses, and could engage more positively and openly with a wide range of users, including interested users that have a range of opinions not necessarily in accord with ONS’s own views.

I have posted my thoughts at the Royal Statistical Society Statsusernet website and engaged with the thinning numbers of supporters for CPIH on twitter which some of you may have followed. As is invariably the case the economics editor of the FT Chris Giles was on the other side of the case although his defence of what he was part of approving was somewhat novel.

CPIH is used by almost no one

Also Professor Tony Yates who used to be at the Bank of England joined in the debate although as far as I could tell he was mostly debating with himself.

 

 

 

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30 thoughts on “What is happening to house prices in Central London?

  1. Hi Shaun
    If you consider ‘prime’ London property as an investment class alongside others, then over the last few years the purchase fee and annual ‘management’ fee have increased sustantially due to taxation changes. This must have made many investors think twice about this ‘class’. If you now add in the recent currency changes its not surprising that investors are looking to more widely spread their geographic exposure. Money will go where costs are lightest and returns are highest.

    • Hi JW

      I am glad you put prime in quotation marks because to a born and bred (south) Londoner like me the idea of Nine Elms being prime takes a bit of adjusting to. Mind you a few places have undergone upwards transformations including Camberwell where I grew up ( although Camberwell Grove was always nicer). As to Battersea Power Station I was watching a documentary on the Who on BBC 4 a few months ago and there they were in their early days in the rather ropey looking streets around it .How times have changed!

      As you say though both returns and fashions change, indeed to be fashionable has its own rather obvious danger.

  2. If you think central London is in a bubble then don’t look at the raft of skyscrapers being built in the places like,Coventry, Leicester, Leeds etc to house students.Foreign investors are paying £60,000 for a guaranteed two year return of 8%.

    Frightening.You also have to wonder what will happen to the thousands of amateur Landlords who’ve bought 2 up 2 downs close by to nurture a 10% gross yield.

    Aside from the currency risk you rightly highlight Shaun,there’s a consequential demand risk if students are being funded in depreciating foreign currencies.

    • Hi Dutch

      I was not fully aware of that so thank you. Do you have any articles or similar as examples please?

      Thinking about it then the idea of a “guaranteed” return from property would be something that if it was on my watch the FCA would be investigating! I guess our authorities are too busy being “vigilant”.

      As to the students position it must have been difficult as the UK Pound £ which i quoted against the Malaysian Ringgit because many buyers in my area were from there. But the far eastern currencies did fall generally and I would imagine a fair few students come/came from there. Actually they did in my day at the LSE too.

      • http://moneyweek.com/dont-get-suckered-investing-student-accommodation/
        ‘You give the developer £40,000-50,000. You get a student “pod” in a second university city with (typically) a two-year rental guarantee of something like 8%.

        Buying a pod comes with all the same problems. The rental guarantee is a red herring – it suggests that you might get that rent over the long term, but is just as likely to be paid out of the profit on flogging the unit than from the income on that unit.’

        • http://homes.trovit.co.uk/student-pods
          ‘1 bedroom flat for sale
          £48,000
          Trinity Church Student Property, 127 Crook Street, Bolton BL3
          Property features

          Within a 5 Min Walk to Bolton University
          9% Net Rental Income
          Bright and Spacious Rooms
          Managed and Let by primo Property Management
          Built by an Experienced Developer’

        • http://www.property118.com/looking-connect-investors-purchased-student-pods/73714/

          A Property 118 thread
          ‘There is a 2-year guaranteed net yield of 8.5% and you don’t have to use the current managing agent after 3 years. The set-up means that the service charge includes all utilities so it’s pretty simple in terms of management. The total rental income is of course subject to the rents being maintained after 2 years but £150 pw including all bills is not too bad, although it’s aimed at the wealthier end of the market.

          This is part of a small portfolio of flats and, given the relatively low cost, I thought it to be low risk. There’s a fair amount written about such schemes on the internet and that was the only due diligence I undertook! I guess it’s too soon to know of any long-term issues. ‘

          ‘I have taken the plunge on 3 units in Newcastle completing April 16, all self contained penthouse studio apartments facing south, floor area 19sq metres cost £107k which is higher than most but the building is far better than some of the refurbs being done. Some say the cost is too high but I have guaranteed income for 3 years of 8% net so cost is relative to return anyway.’

        • Most of these look about 25% too high on purcahse price if compared to a standard 2 up 2 down 70ish sq yard property taking into account the extra space you have to pay for over the student pod. If you are paying a 25% premium, then it appears you have covered your own 8% – 8.5% pa yield.

          I’ve only skimmed as I’m pressed for time but can’t see if pods are furnished? If so this, coupled with the fact they are new build would go some way to explaining the extra moolah required but they still look a bit expensive, especially if you consider that at the end of 2 or 3 years you are presumably responsible for up keep and rental including furnishings (if let as furnished), or finding a student pod management company with reasonable charges to manage it for you.

          The BIG tripping stones to me are that:

          1. it appears to be exclusively for students, thereby limiting your potential tenant market

          2. On a circa £50,000 investment, the net yield after expenses of 8% pa is £4000 pa. Including expenses of upkeep (repairs, annual buildings insurance, electrical and gas installation safety certificates, council tax and water rates to name but a few) and Management company’s fees the rent payable by the student would seem to me to be in the region of £5000 pa and the pods look capable of accommodating no more than 1 student. How many students have £5000 pa to spend on accommodation? Especially when considering the student can rent a 2 up 2 down with another student for around £6000 – £7000 pa equating to £3000 – £3500 pa each. The investor would appear to be relying on the student’s wealth and gullibility here.

          3.. you are gambling that enough other investors are persuaded by the idea of purchasing accommodation solely designed for students thereby providing you with a market into which to sell your pod for the hoped for capital gain, assuming the company you bought from hasn’t beaten you to it by offering another new build pod to potential future investors at a slight premium to your “weathered” 2 or 3 year old pod.

          In fact this whole scheme puts me in mind of the time shares of yesteryear where you bought 1 or 2 weeks of time in a holiday unit and then found you couldn’t sell the damn thing later on as the time share company was offering newer units at the same price or slightly more than your second hander,

          Wouldn’t touch these with a barge pole.

        • Dutch as I explained to Expat,I doubt these developers can get much credit other than via private investors in form of shares issues unless they are big hitter developers.

          Re the price the pods rent at, well, that’s the point isn’t it? That’s what the private investor is looking at when he thinks of 8% but I still seriously question how many students have £5000 pa to spare for rent, of course if the management company (which will no doubt be a sub division of the Developer) drop the rent to say £3000 pa it probably will rent but what of the investors 8% pa then?

          Whilst I’m on, another wheeze in the 80’s was to sell purpose built flats and houses on a housing estate leasehold (up here in the North most are freehold) with conveyances stipulating the Developer would choose the property management company who in turn had freedom to decide what “maintenance” was required. Said Management company just happened to be connected to the Developer.

          Thus, when times were slack and the Developer wasn’t selling much, the Property Management company suddenly found lots of “essential maintenance work” on the already sold properties. Indeed, some conveyances even stipulated that the Developer would choose the Buildings insurer which was another scam although that one was eventually outlawed.

          So, I take your point about the Management company being highly lucrative for the reasons above but again that’s going to hit the private investors yield negatively. The trouble with all these contracts will be the detail and they may fall foul of unfair contract law if the investor is tied to one management company although it did not read like that in the article.

          Given that it is likely the Management company is a subsidiary of the Developer I repeat, the real potential investment opportunity lies in shares in the Development company assuming low leverage and bearing in mind the above caveats.

          I do hope no one here is thinking of or has invested in one of these pod schemes.

      • The developer just margins in the cost and tries to make some of it back. Once the 2 years are up – all bets are off.

        Question is whether you make a capital gain or loss…. When buying at a historical high relative to incomes.

        • As I explained above in a long winded way, the developer has his profit upfront, he doesn’t have to margin anything. I believe at these prices he can afford to leave the property empty for the 2 – 3 year period and he still has his profit if he had simply built the pod and sold it on.

          He’s actually trying to make more again on rentals. The “investment opportunity”here is buying equity in the developer.

        • Noo, the profit comes from the last properties sold. If less has been received, the developer gets bankrupted by interest bills. Hence they are vulnerable to buyers walking away,leaving huge holes in cashflow projections.
          It is a question of finance how the developer funds expensive up front costs.

        • Noo2/Expat Aside from the various points you’ve both made the underlying issue is the management structure from what I hear.

          Apparently,when you buy you’re effectively tied to the management company.That’s where the real profit is.Building the pods and selling them nets off a profit but ultimately these companies owe the banks.If they go bust,the bank gets them back.The management company is where the long term streams of income lie.Most of these rooms rent,it’s just that the price may move.

        • Expat you are correct if Developer is highly leveraged but the less leverage he carries the earlier his profit arrives.

          I worked in the Building trade – civil engineering(basically mark up profit was 10% of total cost so not much leverage could be carried on such projects especially with interest rates where they were in those days!) and house building (mark up profit was 200%!!) in the early 80’s. Finance in those days was ALWAYS cash raised from cash flow of company or rights issue to private investors (the companies I worked for wouldn’t even make it on to the AIM but their turnover at that time still ranged from £20 million – £250. million pa). Banks wouldn’t touch developers because the building market was so volatile, I doubt it’s much different now unless you’re a Wimpy or Barratts.

  3. Great column as usual, Shaun. Could you please tell us what it was that Tony Yates wrote on the CPIH controversy please? I couldn’t seem to find it. I did find his November 27, 2014 column, “Inflation truthers, asset prices” etc. and thought it was offensive. People can agree to disagree on whether the UK CPI is showing too little inflation, but to call people like me who think that it is inflation truthers is hitting below the belt. I’m not an inflation truther, but he sure writes like a deflation nutter.

    • Hi Andrew and thank you

      Twitter conversations are not the easiest to disentangle. Anyway I was communicating with Chris Giles of the FT and Duncan Weldon of the Resolution Foundation as they were part of CPAC when it recommended CPIH and this happened.

      “Tony Yates ‏@t0nyyates
      @ChrisGiles_ @DuncanWeldon @notayesmansecon it’s a free country, and anyone can use whatever data they like for whatever purpose.

      I can only assume he was discussing that with himself and he continued in a similar vein until later he typed this

      “..hence the exclusion of actual house prices in favour of rents which proxy the service flow.”

      to which I replied

      “Rents are too lagging an indicator and we have failed to measure them accurately in the UK.

      Tony

      “agreed. but property of ‘lagging’ not important for eg, defn of a long run cb target…….and actual conduct of mon pol in pursuit of objective inc rents not impeded by the laggery (!)

      Shaun

      ” It has to be as I pointed out to Martin Weale back in 2012 at the @RoyalStatSoc”

      Tony

      “no, it doesn’t, and isn’t”

      That is not all of it but it gives a pretty accurate flavour.

  4. Foreign investors amplify volatility. Some will need to cut their losses in the event of a crash. A crash isn’t all bad, creative destruction of speculative bets and it may eventually bring affordable accommodation for younger Londoners

    • Hi ExpatInBG

      Yes I agree. On the My London Homes Kuala Lumpur webpage I scrolled down it and there were a raft of properties for £3.45 million. So way way out of reach. i would post it if I could find it again.

      We need to find areas in London which are affordable again and that will have to involve some house price falls.

      • Staffing London’s amenities without the property price falls needed to accommodate that staffing is the purpose of HS2.

      • Cooperative build by residents associations might fix the London affordability crisis, but this common sense solution hurts vested interests. Aristocracy, church, big house builders cartel etc don’t want their nice little earner curtailed

  5. http://www.telegraph.co.uk/news/newstopics/eureferendum/12184083/David-Cameron-must-release-figures-showing-full-scale-of-EU-migration-Cabinet-minister-says.html

    I think was related to antoher discussion we were having last week.
    ‘ Official figures suggest that 257,000 EU migrants came to Britain last year, but over the same period 630,000 EU citizens registered for a national insurance number.

    In the last five years 2.25million EU nationals have registered for a national insurance number but according to the ONS just one million EU citizens have arrived in the country in the same period. ‘

    • Thank you, Bob, good read, and confirms another of my views; that the real floor for interest rates is the price of storing cash.
      €500 notes to be withdrawn first in Germany?
      Who’d have thought it?

      • Also worth noting that bank earnings are stronger in higher interest rate environments.
        https://www.chicagofed.org/publications/chicago-fed-letter/2014/july-324
        ‘The authors’ analysis indicates that a low interest rate environment is associated with decreased profitability for banks, particularly for small institutions. However, the estimated negative effects on bank profits are economically small and are outweighed by the likely positive effects on profits of low interest rates boosting economic activity.’

        I wouldn’t say the evidence is particularly compelling on that latter point

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