What is happening in the Central London property market?

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.

Comment

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.

 

 

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21 thoughts on “What is happening in the Central London property market?

  1. Whenever the BoE can no longer keep the plates spinning with QE, ZIRP, TFS, FFL, H2B etc.. there is going to be one epic house price crash in London.

    Being as the UK economy is built upon Southern Englands housing market, when this happens these savvy investors will get the double whammy of a falling currency and house prices crashing 50-70%. (example of 3 bed semis in Watford up for £750K tells me 70% is feasible)

    I look forward to that day, it feels as if its getting closer as the BoE can’t go against the FED for too long.

    Too add when a coalition of the left finally gets into power these foreign investors will be an obvious target for higher taxation.

    If i was lucky enough to have rode the state backed bubble Gidiot, Dave and Carney have created i’d be looking to cash in my chips pretty sharp.

    Shame the terrible trio didn’t let prices continue their slow spiral downwards in 2010 as they promised prior to election as we may have something vaguely resembling a balanced economy.

    • Hi Arthur

      I think it is wrong but I cannot rule out another house friendly foray by the Bank of England. Andy Haldane seems to be untroubled by the problems with his Ivory Tower style thinking and Mark Carney only needs to keep things going for a couple more year and he is off. However they are on the back foot for now as even they would struggle with the fact that inflation is rising.

      • I agree i can see Carney and the free thinkers pulling more rabbits out the hat to keep the plates spinning, only 2 years to go to be the Governor who steadied the UK economy through difficult times avoiding recession with BREXIT thrown in … a couple of hits of QE and a shot of TFS at 0% should do it.

        But with Hammond no longer being able to go after 16 hour a week self employed non-workers like myself via NI, i just wonder if he’ll go after those productive piles of bricks that are screaming to be taxed. Leveraged landlords offsetting interest payments who are on basic tax rate seems to be an obvious target or bringing in section 24 a year or 2 early, if he’s still in a job that is.

        If prices are still insane in 2020 i think May will lose the election to Corbyns replacement and a coalition of the left as we’d have had 5 years of property owners dying off being replaced by 5 years of renters(inc parents) and priced out divorcees at the ballot box.

        Sometimes wonder if Haldane is only in the job to make Carney look slightly less useless, its the only viable reason i can come up with.

    • There’s no such thing as a “balanced economy” there are always parts of every economy that are bigger than others which also begs the question why do all parts of the economy have to be equal before it may be considered balanced?Is that a good thing? Where would China be as it goes down the path of “rebalancing” away from investment led production to a consumption and services model if it started out with services only model but nothing in terms of tangible products to provide services for? It is a necessary economic requirement that parts of an economy are not equal in value.

      “….house prices crashing 50-70%………I look forward to that day”

      I don’t know why because when/if that day arrives the housing market will take the economy and probably your job with it. So if you’re hanging on thinking you will at last be able to afford to buy a house, think again.

      • I’m not saying it needs to be perfectly balanced but if you think what we have right now is balanced enough then so be it. I’m saying the British economy is so unbalanced it needs QE, ZIRP, FFL, TFS, H2B, £27 billion Housing Benefit, bailed out banks etc … just to avoid a property price crash to keep it balanced.

        In the early 1990s prices crashed by similar amounts in Southern England and the sky didn’t fall in, but i am glad you also look forward to the day when someone on an OK wage in Watford can buy a house with wages… a 70% drop is what is needed for that.

        We need and are overdue a recession, they’re a part of capitalism that is necessary and the one in 2008 was kicked down the road with ZIRP/QE.

        If i was to lose my self employed job, i’d survive as i can work with my hands and would go back to work in the oil industry almost anywhere on planet earth or work on building sites that would be booming as people would then be able to afford to buy houses.(joys of deflation)

        It is the ilk who make money in property bubbles and are reliant on QE/ZIRP etc.. that’d be screwed.. Us British vocationally qualified working class plebs will be just fine.

        • Flat wrong, I experienced the 1990 – 92 crash first hand, houses fell 30% and a recession ensued that John Major spent his way out of via Fiscal measures – that was in the days when National debt stood at circa 40% of GDP. It took the economy a further 3 years to recover and Blair arrived taking the credit for Major’s hard work and achievement.

          The UK has only just emerged from a 8 year depression, every bit as long as the Great Depression of the 30’s. GDP is only just above where it was in 2008.

          No recession is due until a liquidity squeeze manifests and is accompanied by a low point in the Kitchin, Juglar or Kuznets cycle (or worst case all 3 of them simultaneously) and there is no sign of any of these things converging at the moment. There is no proven economic theory that states how often a recession should happen, just what elements need to be present to create the right conditions for as recession. Things are shaky but too solid for a recession at the moment although the 3% plus CPI that will be realised by year end should put more pressure on the economy, especially as wages fall further behind.

          Have you noticed the price of crude recently? The oil companies are sucking up losses on pre planned cap ex from the good(bad) ol days of $100 plus per barrel when the cap ex could be justified – they’re not hiring. As to booming building sites it is well established that the housing market and building trade are the first into and out of recessions except as houses collapse in value they’ll take commercial property with them and banks will be left with exposed balance sheets so will tighten lending criteria and start repossessions at which point businesses will have to cut costs to reduce their borrowing by laying workers off. Self employed such as yourself will be easier to deal with – they won’t be offering new contracts. So there won’t be anyone to buy the houses as most will be unemployed.

          At this stage the only way to reflate will be Fiscal except the UK no longer has the requisite amount of fiscal space required that John Major benefited from in the early 90’s to reflate.

          Highly leveraged Buy to letters would suffer but moderately, low and no leverage landlords and owner occupiers would simply sit tight.

          In fact I advocate more interference with the housing market – a blanket price freeze on all housing with the exception of home improvements like extensions where only the cost of materials used would be allowed to be added to the price. This should stay in place until it takes 3x average salary to buy a terraced house, so a long time. This would also be an attempt to break the British disease of property fetishism where you buy a house to make money on rather than to live in and make a home. To break a deeply ingrained culture like this would take many years.

  2. Hi Shaun

    Great article as always.

    Whats the word on the ground wrt Battersea? Have lots of foreign ‘investors’ pulled out?

    thanks

    • Hi Anteos

      Recently the information has been more implied than explicit. For example this was in City-AM last week.

      “The head of the Battersea Power Station Development Company, Rob Tincknell, has issued a rallying call to property industry bosses, saying they must join forces to fight rises in stamp duty.”

      If thing were going as well as we are told would they bother with that?

      • Could you imagine the out pouring in the media should Hammond lower taxes for what are deemed as being crooked foreigners parking their ill gotten gains in London and Malaysian property developers … they must be very desperate.

  3. I think the low level of transactions confirms what I have been told recently. Which is that if you actually want to sell your multi-million pound London home you have to knock down the price. Nobody wants to do this so not many houses are being sold.

    There is also the fact that money laundering has been a big driver of London property prices and there are signs that this is coming into the spotlight.

    I have a suspicion that already-owned properties are being borrowed against rather than sold to avoid taxes and the reality of falling prices. I am not sure how the statistics on LTVs work though, are they just for new purchases or do they cover all the mortgaged housing stock?

    • Hi Casey

      I am always dubious about such statistics as I have seen many examples of such numbers being wrong. If we think of wealthy foreigners buying they may have £20 million of assets but £5 million of borrowings so would that be recorded here? Maybe not and some buy through companies which make it even more complex. I am reminded of The Donald who has lots of assets but lots of borrowings for example

      • My hunch would be that there is more leverage involved in the central London property market than it first appears. Without any numbers though that just remains speculation.

  4. I saw your piece on TipTV.

    I’ve come to the conclusion that it’s all down to force majeure; policy is dead in the water and it’s simply stasis until the inevitable crash.

    Zak Mir is, in my estimation, quite wrong in thinking Carney will be forced to do something; he won’t do anything even if inflation goes way over the 2011 figure. I think Carney will indeed go in 2019 (maybe after the two year Brexit Article 50 notice) never having increased rates.

    • I think you maybe correct, and after 7 years of lies, failure and confusion the Canadian charlatan will stroll into almost any technocrat or top end crony capitalist position in the world for doing his bit for the 0.1% ers at the expense of us plebs.

      When he should have been sacked by Ms May and left the country in disgrace for being so blatantly biased in the referendum.

  5. Shaun,

    Regarding Andy Haldane’s speech on Monday, I was shocked him say that the output gap was due to managers. Talk about passing the buck. This man is a fool and should be kicked out lie 99% of them.

    • Hi Robert S

      I think that he lives in his own fantasy world and does not seem to realise that the real world is rather different to that. For example ideas of an output gap are fine in theory but once you get to the real world they have been misleading more than helpful in the credit crunch era. Yet so many seem to think that next time it will work. Strangely I thought the football was like that tonight with so much praise for England that I was waiting for Germany to score and they did.

  6. Shaun,
    You are calling it a bit early. We are due a housing reset but there’s plenty more baloney that the BoE can trot out. Today’s events are perhaps an excuse for more police state style interference with un-related parts of the UK economy. Having said that the Article 50 announcement could be a trigger. I noticed som FT headlines about GS moving staff out of London, there’s nothing like terrorism to chivvy folk along abit faster. I noticed that Auntie Beeb was very fast to come the, we are Brits, this was expected, everything is normal, keep calm carry on etc at 18.30 this evening.

    I’m still thinking that France will upset the EU balance with their election for president and that will go a way to make the whole of Europe and of course the shaky UK a shade riskier. So I would say later in 2017 before you see material falls across London.

    Certainly year of the Trump will be remembered.

    Paul C.

    • “I’m still thinking that France will upset the EU balance with their election”

      Someone was saying something like that a few weeks ago on here about the Dutch elections and look what happened.

      It may be that the UK is on it’s own in more ways than one in thinking it can make a success of going it alone.

      • Hi there, dont be a victim of fake news. Gert Wilders was a crazed racist, he was gonna ban Muslim religion and close Mosques. I mean that is plainly ludicrous and unrealistic. Yet his party gained a clear 2nd place in the result. This was after the incumbent leader moved substantially to the right. You have to be careful to look at actual result and not be swayed by vested interest media spin. All MLP has to do is tread somewhat to left and hoover up the disallusioned.

        • The fact remains that the populist leave the EU political group failed to be elected to power – thanks for the not likes whoever you are, now I know I’m on the right track. Truth hurts!

    • Hi Paul C

      You remind me of my old boss who’s refrain often was “we were too early”. Actually I am not calling a crash but a fading and decline, how that will play out is hard to say as it depends so much on what foreign buyers do in 2017/18.

      I too fear more police state style intrusion.

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