The barrage of inflation news yesterday did give us some insight into the UK property market. Consumer inflation rose to 2.3% ( CPI and amusingly CPIH ) or 3.2% (RPI) although no such doubts were available on BBC News 24 which confidently asserted several times that prices were rising at 2.3% per annum. This was considerably lower than the official house price growth data.
Average house prices in the UK have increased by 6.2% in the year to January 2017 (up from 5.7% in the year to December 2016), continuing the strong growth seen since the end of 2013.
Regular readers will be aware that I expect consumer inflation to pass house price inflation as 2017 progresses as the impact of the higher inflation impacts and that the bellweather is often London. So far little has changed in the official data although the house prices are for January and not February with London prices rising at 7.3% per annum.
What about Central London?
Property Wire reports this.
Newly released data from Land Registry, average prices reached a new high of £1,818,262 in Central London, largely due to a rally in Q4 which saw prices increase 14% over the previous quarter.
This was apparently led ( yet again) by the borough below.
The uptick has been led, in particular, by Kensington and Chelsea which saw a 24% quarterly increase in prices
However all this is based on a rather low-level of sales.
The picture for PCL sales volumes, however, was far less positive. Compared with the previous year, sales were down 28% with only 3,330 taking place, equivalent to just 64 a week – the lowest number on record. This is half the volume registered just two years ago. ( PCL = Prime Central London).
The last quarter of 2016 did see a 19% rise on the preceding one but of course from a very low base.
However there are issues with London as a whole.
In Greater London, the fall in transactions was even more marked, down 29% in Q4 over the same period in 2015. Whilst annual price growth was more positive, up 5.7%, average prices took a hit across the year, finishing 3% lower than in January.
Bloomberg has more on the trends.
Greater London home prices will probably show their first annual decline since June 2011 when February’s data is published next month, according to Peter Williams, chairman of researcher Acadata. Prices in the city have fallen in six of the past 12 months,
The Financial Times steps in
Perhaps shaken by the possibility that London house prices might fall the FT is already on the case.
London has been cushioned from the prospects of a house price crash by the high levels of equity required to buy property in the capital and the difficulty of mortgage financing at high loan-to-value ratios for all but the biggest earners. Research by Hometrack, a housing market research group, found the average loan-to-value ratio (LTV) in the most expensive tenth of properties was 23 per cent and 40 per cent in mid-priced zones, compared with a UK average of 53 per cent.
Now if we switch that to saying that quite a bit of London property has been bought by cash rich foreign buyers the pack of cards above starts to fall. I have no idea how the fact that even very high earners cannot get a mortgage for London property supports the prices there, surely the reverse!
However, since the Bank of England limited to 15 per cent by value of a lender’s mortgage book the number of new loans it could issue at more than 4.5 times a borrower’s income, the opportunity for large LTV mortgages in the capital has dwindled.
There is another section which appears to make my case much more than theirs.
Mark Pattanshetti, mortgage manager at broker Largemortgageloans.com, said the top end of the market had “paused” after the Brexit vote but was likely to recover. “There isn’t enough supply in London, demand is still there and the top end is not so sensitive to interest rate changes.”
Nonetheless he said banks had reined in their lending on luxury new-build apartments in the capital — a favourite vehicle for Asian investors — after fears that this part of the market had become overheated. Average loan-to-value ratios on such flats had fallen from 70 per cent to 50-60 per cent in the past three years, he said.
Surely prices should be surging if there is not enough supply so how does “paused” work? Furthermore the fact that some Asian buyers might not be able to get mortgages does not seem especially bullish for prices. In some areas they have bought quite a bit of new property including a fair chunk at Battersea Power Station. Also if there is all this demand why did this happen? From the 7th of March.
The housebuilder ( Barratt Homes) said it had sold the units to Henderson Park for £140.5m. The portfolio includes 29 units at Aldgate Place, a joint venture with British Land, 25 in Fulham Riverside and all 118 at its Nine Elms Point tower in Vauxhall, a joint venture with L&Q.
We find as the FT article develops some more fuel for my views.
The pressure on prices in the top tenth of the market has been growing over the shorter term, with falls of 5.1 per cent in the past year. Hometrack expects further “single-digit price falls” over the course of this year at the top end. However in the middle and lower value markets, where prices are less volatile, it predicts “broadly flat” prices over the year.
As the year develops we may get the opportunity to improve the definition of “broadly flat” in my financial lexicon for these times.
I note that there is a mention of a house price crash in the headline and after yesterday’s fall in stock markets I thought this offered some perspective on hyperbole.
Speaking of Hyperbole
Here is Andy Haldane of the Bank of England from Monday.
This would translate into an immediate loss of around 1½ million jobs – a very significant macro-economic cost.
This is Andy slapping himself on the back for interest-rate cuts voted for by er Andy and his mates, so no danger of moral hazard there! Also Andy has issues with his number-crunching elsewhere as he seems to have a blind spot with regard to banking, he starts well but then loses his way.
It is certainly true that financial sector productivity was probably over-stated in the run-up to the crisis. Nonetheless, the subsequent sharp fall in financial services productivity is plainly not the whole story. Of the 1.7 percentage point fall in the UK’s productivity growth since 2008, less than a third can be accounted for by financial services.
Move along please, nothing to see here.
There are various factors at play here. The domestic influences come from real wages in the main as I note that the regional agents of the Bank of England have just reported this.
Settlements were clustered around 2% to 2½%.
So real wages are at best flat and in fact are now negative if we use the RPI. Other domestic influences on the housing market must be fading as even the Bank of England has not introduced anything new since last August.
If we look internationally at house prices and this is a powerful influence in Central London there are two streams which are crossing ( worrying for fans of the film Ghostbusters ). Past owners have seen prices fall in some areas and have lost money in their own currencies due to the lower level of the UK Pound £, although those who have been here for a while have profits still. Newer buyers may be tempted in by the lower Pound and some lower prices. Central London is especially open to foreign buyers with few checks made, surprising really when you look at the situation regarding bank accounts. So foreign money will at times arrive and buy properties and much of this has little to do with the UK as some will be looking to escape troubles elsewhere. But unless there is a surge of them I think the low volume levels tell an eloquent story as in markets they are often a sign of a dip in prices.