What is happening in the UK housing market?

This morning has brought news to bring the current winter chill into today’s policy meeting for the Bank of England. This is that there are more signs of declines in London house prices as the Financial Times reports.

High-end homes in central London are selling at the biggest discounts in more than a decade as sellers continue to set ambitious prices even as the market declines.

Let us look further as of course for most of the period even the concept of a discount was a mirage.

In 2017 homes in the most exclusive postcodes were sold at an average discount of 10 per cent or more on their initial asking price, according to figures from LonRes, a research company. The gap between what buyers will pay and what sellers ask for their homes in this segment of the market is now greater than it was in either 2008 or 2009, following the financial crisis.

The areas most affected are shown below.

LonRes’s data cover London’s most exclusive districts, including Kensington and Chelsea, as well as prime parts of the capital extending from Canary Wharf in the east to Richmond in the west and Hampstead in north London.

Actually though if we look further we see that the position seems rather similar now across London.

Outside the most expensive “prime central” areas, discounts to initial asking price stood at just over 9 per cent — the highest level since 2009.

As ever we see that estate agents have their own language as we note “prime central” is a further refinement to “prime”. Also whilst the situation is now similar so far the more exclusive areas have been hit harder.

Prices per square foot in prime London have fallen 5 per cent since their 2014 peak while in the most expensive “prime central” areas they are down 11 per cent.

Also there are fewer transactions taking place.

Transaction volumes fell across central London in 2017, with the number of properties sold down 3.6 per cent over the year as fewer homes were put to the market.

Although care is needed as how many homes are sold in central London as a 3.6% fall may not be that many. It would appear that there is one remaining source of demand.

Foreign buyers, who are attracted by favourable exchange rates between sterling and most currencies, were an exception.

So presumably not Americans then if we look at the exchange-rate.

Ghost towns?

This issue reminds me of this from the Guardian at the end of January.

More than half of the 1,900 ultra-luxury apartments built in London last year failed to sell, raising fears that the capital will be left with dozens of “posh ghost towers”………The total number of unsold luxury new-build homes, which are rarely advertised at less than £1m, has now hit a record high of 3,000 units.

If you are wondering what ultra-luxury means?

The swanky flats, complete with private gyms, swimming pools and cinema rooms.

Cinema rooms are a new one on me. But as to the problem I don’t know about you but the £3 million price tag gives quite a clue.

Builders started work last year on 1,900 apartments priced at more than £1,500 per sq ft, but only 900 have sold, according to property data experts Molior London. A typical high-end three-bedroom apartment consists of around 2,000 sq ft, which works out at a sale price of £3m.

I guess such numbers distort your view of reality as I note the definition of affordable being used here from Steven Herd.

“We need ‘affordable’ one- or two-bedroom apartments priced at £500,000.

What we are getting seems instead to be more of the same old song.

Molior says it would take at least three years to sell the glut of ultra-luxury flats if sales continue at their current rate and if no further new-builds are started.

However, ambitious property developers have a further 420 residential towers (each at least 20 storeys high) in the pipeline, says New London Architecture and GL Hearn.

My personal interest in Nine Elms as it is close to me – 25 cranes now between Battersea Dogs Home and Vauxhall visible to someone on a Boris Bike – makes me read the bit below and wonder how such a good development can be made of the wrong properties?

Herd says the Nine Elms development, near the new US embassy in south London, was one of the best redevelopment schemes in Europe but consisted of “the wrong properties that Londoners don’t need”

As ever boom seems to be turning into dust as we look back to the lyrics of The Specials from three decades ago.

Do you remember the good old days
Before the ghost town?
We danced and sang,
And the music played inna de boomtown

Halifax

The downbeat view of the UK housing market started today from the view that London is a leading indicator or if you prefer the canary in the coalmine. It was added to by the latest data from Halifax Bank of Scotland.

On a monthly basis, prices fell for the second consecutive month in January (by 0.6% following a 0.8% decrease in December)……….House prices remained unchanged in the recent quarter (November-January) from the
previous quarter (August-October).

Thus we see that anything like the same trend will mean that we will see a quarterly decline when we get the February data. Also the year on year growth is fading away.

Prices in the last three months to January were 2.2% higher than in the same three months a year earlier, although the annual change in January was lower than in December (2.7%).

Finally it is down to a similar level to wage growth although of course we need it to be below it for quite a sustained period to see any real improvement in affordabilty as for now thinks have simply stopped getting worse.

Looking ahead there was a worrying sign for estate agents and the housing industry at the end of 2017.

Mortgage approvals for house purchases ended the year with a sharp fall. The number of
mortgage approvals – a leading indicator of completed house sales – fell by 5.7% month on
month in December to 61,039, the lowest level since January 2015. Over the year to December
2017 total mortgage approvals were 2% lower than in the same period in 2016.

Comment

There is a fair bit to consider here as we only get partial glimpses of the market. What I mean by that is that it is estimated that 30%- 40% of property purchases these days do not involve a mortgage. Thus places like the Halifax only see 60/70% of the market. It is also true that the Nationwide numbers were more upbeat last week. But we do see signs of ever more stress in London and it would be logical for lower real wages to be having an effect.

We need some falls especially in London in my opinion as prices became ever more unaffordable as intriguingly even Professor David Miles admits in VoxEU.

Average house prices in the UK have risen much faster than average incomes over recent decades. Relative to average disposable incomes, houses are not far off three times as expensive now as they were in the early 1980s; relative to median incomes, they have risen even more.

I say intriguingly because missing from the piece and his description as a Professor at Imperial College is his role in all of this . You see he was a policymaker at the Bank of England from 2009 until 2016  who could be described as an uber dove. He even wanted to ease monetary policy just as the UK economy was picking up in 2013. Yet all the monetary easing seems to be missing from his explanation of higher house prices. Is he not proud of the consequences of his actions?

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23 thoughts on “What is happening in the UK housing market?

  1. Great article as always Shaun.

    It will be interesting to see how the Halifax spin this. They generally switch between the indicies to avoid revealling falls. MoM falls and they switch to QTR. MoM/QTR falls and they concentrate on YoY.

    They also retroactively modify the previous months positive data into a negative.

    See Novembers 0.5% increase:

    https://static.halifax.co.uk/assets/pdf/mortgages/pdf/november-2017-House-Price-Index.pdf

    gets downgraded to 0.3% the following month:

    https://static.halifax.co.uk/assets/pdf/mortgages/pdf/november-2017-House-Price-Index.pdf

    Lie, Damn Lies and Statisitics 😉

  2. I don’t think they are proud. I think they think they are being pragmatic with a bad hand. Although I would guess a great number of these people are also in utter denial about their society destroying role judging by this recent blog on the BoE website (see Link 1 below). Can be summarised as “not me gov, it’s largely demographics innit”.

    The more explicit explanation is one that they themselves have touted before is that it is policy in order to engender a ‘wealth effect’ to avoid recession….repeatedly. Add mass immigration to that too in order to deliberately suppress wages and ’embedded inflation’…i.e. make everyone poorer in reality. The last excuse is not one I’ve heard them state (although I do note your mate Chris Giles once did an article about this – see Link 3, below), that in fact they actually see these developments as a kind of ‘export’ in order to attract ‘capital’. Plus they consider these transactions to be safe cash, but of course we know they are not. Indeed, I suspect the British developers’ roadshows in the Far East actually dragged UK financing companies / banks with them.

    Link 1. https://bankunderground.co.uk/2018/01/31/population-ageing-and-the-macroeconomy/?sf83700741=1

    ” We find that demographic change alone can explain 160bps of the 210bps decline in interest rates since the early 1980s measured by Holston et al. (2017). The model predicts an increase in house prices of over 45% since 1970, corresponding to around 75% of the change observed in the data (Chart 4a). It also explains the doubling of the private debt-to-GDP ratio between 1970 and the start of financial crisis, an increase of around 45pp (Chart 4b). These results confirm that ageing does have a sizeable economic impact. Implications for cross-country imbalances are also important: the pattern of foreign asset accumulation (net borrowing and lending) across industrialised economies predicted by the model explains almost 30% of the variation observed in 2010.”

    Paul Hodges in his blog on this matter calls the BoE’s role “printing babies”.

    Link 2. http://www.icis.com/blogs/chemicals-and-the-economy/2018/02/london-house-prices-risk-perfect-storm-as-interest-rates-rise/

    Link 3. https://www.ft.com/content/ff14d0b6-9e4f-11e3-b429-00144feab7de

    “The sale of multimillion-pound London flats to foreign billionaires ranks as an export success” Chris Giles (LOL)

  3. I do wonder what percentage of the 30-40% buying who don’t require a mortgage are those who are merely downsizing and cashing in the free money awarded to them by George, Carney, King, Osborne, Hammond and Darling. As not many people could afford to buy with wages/savings in the biggest property bubble in the UK’s history (in many parts of the UK).

    Wasn’t the wretched Mr Miles on the payroll of a lender specialising in BTL mortgages, certainly speaks out on behalf of landlords a lot. Sad that snake oil sellers like him are spreading their economic illiteracy in what is meant to be a highly regarded university. Wonder if the kids he’s teaching manage to put the pieces together and realise the reason they can’t afford to buy a house is because of him!

    • Hi Arthur

      As to components of the cash buying downsizing is one and in fact my previous neighbours had done that. I was also thinking of inheritances and the Bank of Mum and Dad. In certain parts of the country people could conceivably save up the money but as you say that is rather unlikely in London.

      As to his tenure at Imperial College I am afraid it is just par for the establishment course.

  4. Neo-Liberalism requires wealthy consumers and poor workers. The only way you can have both in one country, is to keep asset prices rising. Since such a large proportion of the population’s only asset is its home, the absolute need for a housing bubble becomes apparent.
    Neo-Liberalism eventually depends, absolutely, on govts. supporting asset prices at increasing levels forever. There is no way out, EVER, other than absolutely removing the connection between work and wealth, probably by robotics and guaranteed income.
    Neo-Liberalism is not capitalism; it is social corporatism.

    • ah, is this the Rods and Axe of power I see before me?

      Frankly see more chance of Hammers & Sycles

      either way a dystopian future awaits….

      Forbin,

  5. Hose prices are three times higher in relation to disposable income than in the 1980s, but what was the difference in mortgage interest rates?
    Probably not quite such a scary figure, when monthly payments are worked out.

    • Back in November 1979, six months after Margaret Thatcher became prime minister, interest rates hit 17 per cent, the highest since records began in 1694.

      I remember 8-10% and when checking I see that the average was in the 80’s about 10%

      most of todays mortgage rates are taking LTV of 60-75% for 3.7-4.5%

      yikes !

      for a 90% its 4.5 to 5.5%

      cant seem to get 95% anymore ,ehehehe

      I paid an extra one of bond on that back then – about 2% of the loan on top of a 10% deposit , 3x 15K = 45K plus 5K deposit . I was furious over the bond in that 6 months later the house was selling for 60K …..

      selling for 245K now

      Forbin

    • Nick, possibly fine today using your mathematical logic ( of somewhat stretched) . Please re-compute for rising interest rates. They coudl easilt treble from 0.5 to 1.5% What do you monthly payments look like when doubled.?

      • from 8 to 15% yup

        double the cost – keys handed back by many and back home to mum & dad to weather it out …

        except not now, too much is “invested” by the Big Banks – they will go bust

        nothing has changed since 2008 , we’re supposed to be out of this kind of thing but no were not .

        so by hook or by crook the show must go on !

        All Hail Our Banking Masters !

        think yourself lucky you have a front row seat , pop corn anyone?

        Forbin

        • Talking of our banking masters Forbin, have you seen the developing robosigning scandal at RBS?
          Allegedly forging signatures on loan docs and then repoing businesses and selling them on to others.
          Quite what we were being saved from by keeping them afloat I’m not sure.

          • Hi Dutch

            I don’t support the TBTF Banks

            I’d prosecute the lot and have a plan to let them all go bust for the rotten apples they are

            I don’t expect to happen as too many MPs have their future set in the Banking industry .

            scandal ? oh yes , and bu@@er all will be done about it , hence

            ” governance of the people by the Banks for the Banks ”

            Forbin

  6. Shaun, one of the most interesting statistical takeaways for me was that half of the london properties advertised for sale are withdrawn from sale. For me this is a crucial seller insight, into their mentality and readiness to accept “lower than perceived” prices.

    So it seems that despite a soft market in prime for up to 3 years now folk are still not mentally ready for a falling market, such is the promise of wealth from property that they will not do it.

    Probably in perverse outcome, the folk hwo are baulking at a 10% fall today may find themselves futher baulking at a 12% fall in 6 months time. The interest rate provocations in the stock market may shock a few more into an unhappy realisation.

    We shall see.

    • I saw this issue back in the 90’s

      couples refused to see that just because their house had fallen that the next house they wanted had also fallen and ergo they’d have to splash out less to get further up the ladder …… no no no I must not loose anything on this house !!

      and frankly since then , they have been right , the constant drive upwards has made everyone think that they will not be the one left holding the baby …..

      and I cannot see why politicians will not help them too.

      by all means they can command – its an interesting show

      pull up the chair – here, have some popcorn …. 😉

      Forbin

    • ‘So it seems that despite a soft market in prime for up to 3 years now folk are still not mentally ready for a falling market, such is the promise of wealth from property that they will not do it.’

      That’s an interesting slant Paul, highlighting the fact that a lot ofpeople selling aren’t experienced traders used to adjusting price expectations relative to the market.
      Gonna be a shock if Paul Hodges is right.

  7. A lot of prime London property is an alternative asset class to stocks, gold, bonds, antiques, now bitcoin etc. A lot is paid in cash ( laundered). Its put on the market to test returns, then taken off again if return is not forthcoming. A lot of it can be held for the long term, like artwork. Some years of soft prices doesn’t really hurt these guys, as long as prime London looks as good as other asset classes over the long term there will always be eventual buyers to provide an adequate return.
    The rest of London and S. East may temporarily be affected by ‘market sentiment’ flowing from prime, but decreasing prices in say Tonbridge are ‘real’ and are because of real homebuyers economic position.

    • Yes I think this analysis is spot on. Many owners of houses in London are rich enough that they can buy and hold indefinitely. But some can’t or are forced to sell perhaps even for estate reasons, so they are setting the current price. But what about the future? Contrary to the Austrian internet types who invest this website comments actually low interest rates are bad for house prices , as can be seen by the relative stagnation in house prices since the GFC. This is because they indicate tight monetary policy , you can only have low interest rates when inflation is low. So ironically if we are seeing higher general inflation, interest rates will rise but so will house prices.

  8. The London property market has been built for the benefit of money launderers and various other criminals and despots. It’s correlation with the needs of ordinary Londoners is exactly zero. The sooner prices go belly up the better as far as I’m concerned. Sorry to sound a tad harsh.

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