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.
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.
- 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.
- 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.
@CityAM 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.
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.
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.