Are London house prices set for more falls?

This morning has brought news on the state of play concerning UK house prices although I think the Guardian has tripped over its own feet a little in an attempt to slay several dragons at once.

House prices in parts of London that were once at the epicentre of the UK property boom have fallen as much as 15% over the past year in fresh evidence of the impact of the EU referendum.

Actually if you then read the article no evidence of it being caused by the EU referendum is given but in the article linked to by it from December we are pointed towards one rather likely cause as Russell Galley of the Halifax tells us this.

“As a result of the rapid price growth in the capital, house prices in relation to average earnings are still very high in London; at 8.8 times annual average earnings they are close to the historical high of 9.”

I do like the “additionally” in the sentence below, what could it be about the house price to earnings ratio that causes this?

Additionally, mortgage affordability in London is worse than its long-run average, the only region in the UK where this is so.

As we progress on we discover that the peak or nadir of the falls depending on your perspective is rather close to home for me.

Figures from Your Move, one of the UK’s biggest estate agency chains, reveal that the average home in Wandsworth – which includes much of Clapham, Balham and Putney – fell by more than £100,000 in value over the last 12 months………..Homes in the London borough of Wandsworth were fetching an average of £805,000 in January 2017 but this has now fallen to £685,000.

There have been falls elsewhere too.

Other London boroughs are also showing steep price falls. In Southwark, south London, the average price has dropped from £666,000 to £585,000 in 12 months, while prices have pegged back in Islington, north London, from £750,000 to £684,000.

At this point with Wandsworth and Southwark on the list I am starting to feel a little surrounded although a common denominator is beginning to appear.

Wandsworth and Southwark are home to huge speculative property developments facing on to the River Thames – including the Battersea Power Station development – but the market for £1m-plus one-bed properties has shrivelled in recent years.

The scale of this was explained in the Times just under a fortnight ago.

The new neighbourhood — Europe’s biggest regeneration zone, with 39 development sites across 561 acres — will contain 20,000 homes as well as cultural, retail and business facilities. It is set to be completed by 2022. A £1.2 billion Northern Line Tube extension will create two new stations, Nine Elms and Battersea Power Station, to open in 2020.

Or if you prefer in in picture form, here is a part of it which is yet to come.

If you cycle through it as you now can you get an idea of the scale that somehow cycling past does not quite give, If we return to the economic consequences of this we see that the existing lack of affordability in central London combined with the surge in supply is something that can explain the recent price falls. It was always going to require quite an influx of wealthy people to populate the area and of course that would be in addition to the many who have arrived in recent times. A sort of “overshooting” I think in assuming that a trend would not end. If we wish to help the Guardian out we could suggest that the EU Referendum has probably deterred some although it does not actually make that case and curiously I have seen one or two bits of evidence that more in fact have arrived ahead of possible changes. So something along the lines of what happened with Hong Kong a couple of decades ago.

Looking wider

If we do we get something much more sober. Here is LSL Acadata which produced the report.

Prices in London fell again in January, down £4,662 or 0.8%, leaving average prices in the capital at £593,396. That’s down 2.6% annually, the biggest decline since August 2009.

So we have gone from the 15% click bait to a reality more like 2.6%, However as we have often discussed this is significant as the UK establishment pretty much lifted heaven and earth to stop a significant house price fall post credit crunch. I remember prices falling in my locale and wondering of those selling were making a wise decision and that buyers would regret it? Instead of course we got the UK establishment house price put option as interest-rates were cut to 0.5% where they remain, QE and when they were not enough more QE the Funding for Lending Scheme and then more QE as well as the Term Funding Scheme. The latter has now finished albeit a stock of £127 billion remains as we await the next move.

Before we move on there was another hint in the data that affordability is the main player here.

The cheaper boroughs have fared better. More than half have seen price rises over the year, led by 4.5% growth in Bexley, which, with an average price of £363,082, still has the cheapest property in the capital outside Barking and Dagenham (£300,627).

Up up and away

We get reminded that the UK is in fact a collection of different house markets which are connected but sometimes weakly.

That’s now led by 4.6% annual growth in the North West, one of four regions to see new peak prices in January (along with the East Midlands, the South West and Wales).
Just eight months ago, the region was trailing every other region bar one. Now, it’s seeing strong growth in every part of the market: at the bottom, Blackburn with Darwen has seen the biggest increase in prices in the country, up 16.4% annually. At the top, Warrington is also seeing double digit growth, with prices up 10.3%.

Comment

We find on today’s journey that the trends for UK house prices remain in place as we see substantial falls in the new developments in central London and helping make the average price fall there too. This means that the UK picture is according to LSL Acadata as shown below.

Including this February, we are now in the ninth month where the annual rate of house price growth has continued to slow. It now stands at 0.6% when including London and the South East, or at 2.5% when excluding these two regions.

This represents quite a change from the 9% of February 2016 and the change has mostly been seen in London. This particular series makes a lot of effort to be comprehensive but like all efforts has its challenges and estimations.

We have subsequently recalculated all our various house price series on the basis of the new weightings, which has had the effect of decreasing the average house price in December 2017 by £6,340.

So did the average house price from this series go above £300,000 or not? I will let you decide.

One consequence of the new weightings is that the average price of a home in England & Wales has fallen below the £300,000 threshold, which we reported as having been breached during 2017.

As we mull what is or is not Fake News there was this in the Evening Standard?

Millennials, criticised by baby boomers for buying avocado on toast instead of houses….

Meanwhile eyes turn to the Bank of England as we wonder how it will respond as house prices in London fall? Perhaps its Governor Mark Carney is already thinking that June 2019 cannot come fast enough.

 

 

 

 

 

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39 thoughts on “Are London house prices set for more falls?

  1. In order, the group to blame for negative news by mainstream(fake news central) news:
    1.BREXIT.
    2.The Russians.
    3.”Speculators”.

    Spoke with a work colleague the other day who said his son and partner were recently offered mortgage terms on a secondhand property, they were offered £180,000 at 2.5% fixed for 5 years, their combined income is £50,000, so I calculate their mortgage costs to be £2,917 which represents just 13% of their net monthly income, if the rate doubled it would hardly be of any significance to them would it?And yet everyone I know who has borrowed previously unimaginable sums of money to buy a house(or houses), just laugh when I ask them what will they do when the fixed term ends and the rate reverts to 5% or more, and they just laugh and say “I’ll get another fixed rate deal at 2 or 3%” – which many have done already.

    Can anyone see Carney or his successor allowing rates to double or more form here – i.e let fixed rate mortgage deals rise to the normal rate?

    So how exactly will house prices correct let alone crash from here? London of course is different, plenty of room for further fallls, since prices there have risen more than anywhere else, but the demand is so vast that every “dip” will be bought by desperate buyers who think that drop is their last chance to get on the ladder before prices start to go up again, these desperados will curtail any further falls.

    • Mortgage cost is £808 a month on a £180,000 at 2.5%,or just under £9700 PA, so around 20% of their pre taxed income.

      What did they buy and are they planning not to have kids? As kids are a necessity for the base of the Ponzi economy.

      Agree about pent up demand being vast, but if significant falls do appear are there that many wanting to catch a falling knife?

      Bringing back just a drop of capitalism will see prices crash, i.e. A couple of Tories with free market principles (far fetched i know) taking over May/Hammond and ending Help2Buy or Labour following Adam Smith and bringing in Land Value Tax as they’ve previously mentioned. Failing that the markets going against UK PLC and interest rates spiking above that of Americas.

    • ‘So how exactly will house prices correct let alone crash from here?’

      Reality will at some point bite.It’s just the when and why I’m not sure off.There are too many people stacked up on the ‘property prices only go up’ side for this to end well.I suspect once they start dropping,the trap door will open.

      Two things I see creating problems are QT and a rising ten year bond yield in the USA.Also on the demand side,BTL landlords are paying their first section 24 taxes and many families just can’t even contemplate trying to buy.

      Worth noting that in their January report LSL Acadata had a negative yoy print of -0.4% which has been readjusted up as more sales have been lodged at the Land Reg.(I think they provide guesstimates for the most recent months or an index of indices)

    • I have had three letters informing me that interest rates on my savings are dropping. A case of getting their retaliation in first. They can then demonstrate what good corporate citizens they are by putting the rates back up again when the B of E increases rates in future. Obviously they see a rate increase coming. Or am I just being very cynical?

  2. Shaun, thanks for highlighting the connection between house price falls and Brexit (circumstantial at best). Does this mean that this subject will no longer be discussed at dinner parties, will we have to chat about “me too” instead?

    I do wonder how folk justify house price purchases in a falling market? I guess as you suggest if they choose an area which is still rising then thay must think that is a very savvy insight and great investment decision. A furthr intrigue to me is what the mortgage companies will do once falls across the board become part of market expectations… surely they will need more defence in terms of deposit, 15% rising to 30% as expectations are reset and the buyer has to fund the first 30% of any fall in value. That would feedback into the market slump too, once things run downhill they gather pace.

    I am afraid MC is going to have to act quickly. Falling prices do not support the debt fuelled consumer economy we have so carefully encouraged.

    Paul C.

    • Hi Paul, many of the best mortgage deals are now dependent on a 20% deposit, as the deal I post above was, the higher the deposit, the better the rate you get.

    • Even if the Market is falling you have to remember that money spent on rent is thrown away anyway. You get nothing back. Money spent on a house that is falling in value will still be better than the rent option as you have some equity as house prices will never fall to zero and mortgage payments are often cheaper than rent. Over a 25 year period rental prices will increase far more than a fixed rate mortgage and they have increase more than variable rate mortgages as well.

      • If its falling in value then you’ll have no equity and deposits will be lost.

        Problem with taking on a mortgage at this moment in time is that all western central banks and government are desperate for inflation and should it really kick off at some point in the coming years then that 2% mortgage will not be so affordable if interest rates are high end single figures or even double figures.

        Corbyn coming in and spraying helicopter money everywhere will be enough to see a spike in interest rates imho.

        The plebs seem to think a low interest environment is here forever; but are they?.

        • Arthur, you are assuming the Bank of England will do the right thing and raise rates when Corbyn unleashes his spending plans and hoses the economy with money.

          They won’t! Do you really think they are going to allow another financial collapse after what heppened in 2008?They are going to protect the housing market at all costs, and don’t forget the government cannot afford higher rates either, by then the national debt will be over £2 trillion – that’s £2,000,000,000,000 – 2 million million! 1% interest on that is £20 billion a year, that’s how much the government will have to find extra for every one percent increase in interest rates.

          Hence my previous predictions regarding the introduction of QE4 in the US and more QE over here, governments cannot afford to let interest rates normalise.

          • But the British govt not being able to sell their debt to cover the bills will see a far greater financial collapse, hence rates will be forced to rise.

            Why are institutions/nations going to lend the British govt money at 1.5% when inflation is vastly higher? When they can get far higher and safer returns buying US debt.

            At some point the govt/BoE will lose control.

            USA QE4 and more QE here which can only realistically happen in a downturn will be helicopter money imho.

          • Too add we didn’t get a true financial crash in 2008, it got kicked into the future.

        • My argument is that even with falling prices it will always remain positive so you may lose equity but you will never completely lose it all. If you add up the cashflows of 25 years worth of renting vs 25 years of mortgage ( even variable rate ) it will be cheaper to have a mortgage as rents go up in the long term along with inflation and you are bound to have some value left in the property at the end. Even houses with subsidence have some value left in them. Although it may make the house cheaper to buy if you wait for a bottom in the price graph you still have to live somewhere whilst you wait and that means rent for most people unless you can stay for free with friends or relatives or you have a house already and are buying another one with no intention of selling the first.

        • Arthur,
          “But the British govt not being able to sell their debt to cover the bills will see a far greater financial collapse, hence rates will be forced to rise.

          Why are institutions/nations going to lend the British govt money at 1.5% when inflation is vastly higher? When they can get far higher and safer returns buying US debt.”

          You seem to be answering your own question here regarding why would anyone want to buy UK gilts when the yield is less than inflation?:

          That is why QE was introduced in the first place, as central banks knew noone would buy government bonds to the point where yields would be almost zero, so they did the buying themselves!!!
          The same applies in the near future, as central banks will be forced to keep buying bonds to keep yields from rising, and just creating the money from thin air to do so.The more money Corbyn spends, the more gilts will be issued and paid for by Carney and his computer keyboard,interest rates will therefore never rise apreciably, and so the housing bubble will be protected.Sterling however will be worth two tenths of **** all by then.

          • QE doesn’t buy all govt debt as you seem to be implying, hence Carnages line that “we are reliant on the generosity of strangers”.

            Britain is a medium sized economy it cannot print indefinitely as you seem to be getting at.

            If it tries the currency will get decimated, leading to vast inflation leading to interest rate rises.

            And institutions will always buy UK government debt, just they will expect a realistic return.

      • ‘Even if the Market is falling you have to remember that money spent on rent is thrown away anyway.’

        And money paid in interest is?????

        If you’re renting on a 3-4% gross yield,it’s hard to see why you’d buy.London is sub 2% in some areas.

        • Dutch,
          Re your post “If sterling drops,theyll have to raise rates.”

          No they won’t!!! – who will force the Bank of England to raise rates? Cast your mind back to the post BREXIT summer of 2016, with sterling in freefall, where were the interest rate increases then?

          All you will get is Carney threatening to raise rates, which after it has has been done a hundred times before and never happens, doesn’t really carry much weight anymore.

        • Bootsy is saying eventually you pay off the mortgage but never with rent . So what if you’re paying interest? Eventually you own the house and you pay no more versus renting where you pay until the day you die.

          • When you rent, your landlord is responsible for all upkeep and repairs to the building, whilst the responsibility is “buyer’s”, even if you only nominally own the house. (It belongs to the lender until you pay off the loan).
            Since mortgages are heading north of 30 years, and since the lack of housebuilding means that the overwhelming majority of mortgages are on second-hand, if not “mature”, properties, and that this responsibility can amount to a significant sum.
            There are also questions of third party liability, etc. and the costs of moving away from horrendous neighbours can also be significantly greater than when renting.
            So, although in my personal view, I tend towards “Bootsy’s” position, I would not say that it was cut & dried.

      • Hi there, I guess if there’s a 20% fall and the buyer loses their 10 years of saved deposit then that is OK, as long as the bank lending the rest of the mortgage is un-touched then that is just fine…? 😉

        • Actually if the bank goes under the mortgage with you is sold to another party under the same terms. See Northern Rock. You as the lender are unaffected. You still have the same remaining amount of debt to pay off.

    • “I do wonder how folk justify house price purchases in a falling market? ”

      They need somewhere to live and do not suffer form the British house fetish disease where you buy a house to make money, Oh yeah, and to live in.

  3. Shaun,
    Can I ask if you know how Acadata arrive at their initial estimate for the most recent month given the data from the LR would be scarce?

    Which index do you nthink gives the most realistic picture of the housing market?

    • Hi Dutch

      They have built up a computer model which they describe thus.

      ” It was this delay, and an early LR failure to publish an electronic database, which meant that LR data were little used until Acadata developed the “index of indices” forecasting model. This model is still the basis for our initial monthly LSL Acad HPI “forecast” result – a result updated in every subsequent month until
      every transaction is reflected in the index. Our LSL Acad HPI “forecast” is intended as a guide to the LSL Acad HPI “updated” result, available a month later. If we did not prepare a forecast, our index would comprise the LSL Acad HPI “update”, a
      further month in arrears, but based upon c.85% of all transactions”

      In the end it is the Land Registry or LR as they call it but of course that takes time and as we are impatient we substitute timeliness for accuracy. The ONS have had problems with new builds in their HPI series so in the end it is hard to argue with Acadata.

  4. Great blog as always, Shaun.
    Less than a month ago the new British Columbia NDP government toughened the taxes on foreign buyers of residences in Greater Vancouver, home of the great Colin James, brought in by the previous government in 2016. It also extended them to other cities in the province:
    https://www.theglobeandmail.com/news/british-columbia/canadians-with-bc-vacation-homes-to-be-hit-with-new-tax/article38061049/
    Since London house prices are dropping now would hardly seem to be an opportune time for the UK government to bring in copycat legislation. Just the same, it may be something for British legislators to look at, over the long term.

    • Hi Andrew and thanks for the links.

      Are the British Columbia plans legal? I do not mean banning foreign buyers as any sovereign country could do that but I mean banning those from other parts of Canada? That would cause quite a ruckus pretty much wherever it was deployed in the UK.

      Also I found it hard not to have a wry smile at this bit.

      “Jock Finlayson of the Business Council of British Columbia estimates that the real estate sector has accounted for at least one-third of economic growth in the province over the past three years.”

      It would be nice to see the calculations….

  5. As successive government have reduced the benefit of a pension ( apart, from theirs of course). Many people are looking to fund their retirement from the equity in their home, so a significant fall in house prices would be a disaster – never mind those on interest only mortgages!

    • So you boomers dont get to use the house as an ATM dishing out unearned money, but workers under 50 get to buy a house with wages and have money to put in the economy.

      So no it wouldn’t be a disaster.

      • I was not just referring to “baby boomers” for quite a few “under 50s” it would also be a disaster.
        Very few ” baby boomers” I know are sitting on a huge pile of equity, some of them are are even on benefit!

        • You were referring to people using the house as a pension, thus the 50+ generation. No one my age thinks in such a way, well no one i know.

  6. after reading the comments here – I ‘m going out to buy some more popcorn!

    going to be quiet the ride ! – Zeus – Tron II

    Forbin

    PS : who will save the Banks now ?

    • Forbin, it doesnt mean that house pricss will crash just because we discuss the prospect but I will order some caramel coated pop-corn just in case. It would be a once in 20 year event if it happened before the GE in October.

  7. Interesting on the BBC Business page that the number of mortgage deals requiring a 5% deposit has now breached 300 for the first time since 2008 – so that is probably why deposit rates are falling! I still have yet to establish who takes the hit if the buyer’s equity is used up on a ‘Help to inflate prices’ deal – I suspect it is Government cash, but presumably that will come under ‘borrowing to invest’ to avoid the real hit on public finances.

    I went to a public event recently addressed by a fan of Trump, who headed up a US state banking association. He railed against the US debt rise under Obama and then backed Trump’s tax cuts – I think he subscribed to the view that tax cuts would produce economic activity and so generate the tax cash to fill the gap, not least forgetting the marginal propensity to save effect on tax cuts. So, I asked at the end whether we were in danger of repeating the same mistakes with Reaganomics opening the US debt up when monetary policy was still very loose despite the Fed promise to raise rates a bit, so that with ‘credit tests’ money would be poured into housing. His response was that 2007 was about excess supply over demand!

    Given the repeated nonsense about insufficient supply (see the Daily Mail blamIng immigrants as much as the Grauniad talks about Brexit), it would be interesting to see May/Carney explain a fall in prices when supply is still supposed to be restricted.

    The cracks are already showing with flats – or ‘homes’ as the Govt likes to call them – falling everywhere in price. Next will come the BtLs as the rent yields are already low in London, so BtL must be based on an expectation of rising prices now. It was a fascinating calculation that late great aunt’s place in Parsons Green (now in 2 flats) was yielding only 3% and what would happen in yield terms if the required rate rose to 5% – basically each flat, currently about £700k would fall to £400k. It has little to do with rent levels or ability to pay (rents are not really much more for a newly- qualified City lawyer than they were 30 years ago we hen I was one). It is the return on the investment and the belief about where prices are headed, which will determine the direction of travel for prices. The next public event is on behavioural economics, so we will hear the latest on the herd.

    • I like it:

      it would be interesting to see May/Carney explain a fall in prices when supply is still supposed to be restricted.

      You hit the nail on the head there. That is the lie that keeps the lemmings running for the cliff. Theres a gawd awful shortage, buy now or forever lose your chance. We just need to flush out the un-occupied properties a Russian ownership tax should do that 5% market valuation per annum.

  8. Let us assume that U.S. corporations will repatriate at least 25% of their estimated US$2.6 trillion of offshore funds to take advantage of a one-off 14% tax holiday. It will not matter if they are selling euros, yen, pounds, or yuan. Switching their fund from the offshore dollar funding markets to domestic dollars will have a similar impact to the same trend that took place between 1980 and 1985 that drove the dollar to all-time record highs. Take a close look at that period in the 1980’s where the dollar rose to its enormous highs while the yield on the 30Y subsequently also rose. UK interest rates were pushing towards the double digit level, BOE in my opinion will again have to defend sterling bringing on the UK its long awaited housing market crash. Home owners who expect their house owning pension pots to be safe will be stunned.

  9. Thankyou for reminding me why I don’t read the Guardian….or any national newspaper for that matter. I can’t even do the FT nor Bloomberg anymore. The whole scene is just so tainted.

    For anyone out there wanting their news served with a straight bat, I can recommend the Reuters website. Dry but factual – the way I like it.

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