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?

Advertisements

What can we expect next from UK house prices?

This morning has brought us an update on what the UK establishment treat as a not only a bell weather but also a cornerstone of economic policy which is of course house prices. The Halifax which of course represents Lloyds Banking Group which is a big player in the mortgage market so what is happening?

On a monthly basis, prices also fell by 0.6% from November following a 0.3% increase in both October and November; this is the first fall since June 2017.

So the headline catcher is that house prices fell in December however these numbers are a pretty erratic series so let us look for some perspective.

House prices in the final quarter (October-December) were 1.3% higher than in the previous quarter (July-September), down from 2.3% recorded in October and November,

So we move from a recorded fall to an apparent slowing which is backed up by a comparison of the annual data.

Prices in the last three months of 2017 were 2.7% higher than in the same three months a year earlier although the annual change in December was lower than in November (3.9%).

Another way of putting the apparent slowing is that at this time last year the annual rate of growth was 6.5% so there has been a decline which we expected. As it happens the annual decline is very similar to the 2.6% reported last week by the Nationwide Building Society so there is some confirmation there. However the pattern has been unpredictable as for example there was something of a rally in the autumn of 2017 in the Halifax data which was against the trend. For those who want to know an actual price or at least an average one here it is.

The average price of £225,021 at the end of the year is 2.4% higher than in January 2017 (£219,741).

The problem comes when we look at a comparison of such a number with what someone is likely to be earning. Such reports come with estimates themselves which in both cases ( Nationwide & Halifax)  have pretty much returned to the pre credit crunch highs or something of the order of a ratio of 5.5. However if we look at the official average weekly earnings figures and (perhaps generously) multiply by 52 we see that the answer of £26,520 requires multiplying by around 8.5 times to get the average house price.

Activity

For all the discussion of change this has been quite stable as this suggests.

Monthly UK home sales exceed 100,000 for the eleventh month in succession. Sales have remained above 100,000 in all months of 2017. In November they reached 104,200, the highest monthly level since March 2016……… For the past
twelve months mortgage approvals have been in the narrow range of 64,900 to 69,500.

The main change is that fewer seem to want to sell.

Turning to supply, new instructions to sell continued to deteriorate at the headline level and has now
fallen for 22 consecutive months – the worst sequence for close to eight years

Ominous perhaps.

What does the Halifax think about 2018?

Overall, we expect annual house price growth nationally to stay low and in the range of 0-3% by the end of 2018. The main driver of this forecast is the continuing effects of the squeeze on spending power as inflation has outstripped wage growth and the uncertainty regarding the prospects for the UK economy next year.

The first issue is that even they do not expect much if any which is revealing although their reasoning seems odd. For example unless the commodity price rises I looked at on Friday continue UK inflation seems set to fade especially if the UK Pound £ remains around US $1.35. Also whilst economists continue to write about uncertainty the main population sees an economy growing consistently if not that fast. Some of course will have fears and part of that will be Brexit related but currently economists are projecting their own “monsters of the id” on everyone else.

London Calling

This continues to provide what may turn out to be a clarion call. From The Times over the weekend.

Almost half of the homes on sale for between £1 million and £2 million in London have had their prices cut, with average reductions of £142,000, rising to nearly £900,000 in extreme cases.

Presumably not the £1 million homes seeing price cuts of nearly £900,000! It is not just a London thing as I note I may not be the only person who likes a slice or two of Christmas cake.

Across Britain one in three sellers reduced their asking price last year, the highest proportion since the double-dip recession of 2012. However, sellers with homes in the “marzipan layer” — those worth less than the super-prime stock of central London (the icing) but more than most of the rest of the country (the cake) — are making the biggest price cuts.

Some of the effect here has been the rise in Stamp Duty on higher-priced properties but I note that Henry Pryor is reporting a change in psychology.

But almost all the buyers are discretionary and feel there is no harm in waiting. With an uncertain Brexit around the corner, buyers feel they can sit tight or rent and still be no worse off because prices will be even lower next year.

A change in psychology may be enough in itself although real falls also usually have surveyors reducing valuations. Of course however there needs to be some perspective as some of the comments suggest.

Heck even my parents house is now only worth 98 times what they paid for it !

(Down from 100 times before the referendum) ( Anthony Morris)

Or.

So overpriced homes in London are now marginally less overpriced. I think we’ll survive this somehow. ( John B )

Blackfriars

For those unaware this is on the edge of what is regarded as the City of London as well as being a big train and tube station. It also had a development described in the advertising like this.

The ad portrays a rich couple embarking on helicopter rides, being serviced by an astute butler and sight-seeing the capital in a Bentley. The couple also admire a sculpture of the building they have just acquired a penthouse suite in. ( h/t @econhedge and The Drum)

How is that going? From Bloomberg.

An investor who agreed to purchase an apartment at the ritzy One Blackfriars project on the banks of the River Thames is offering the two-bedroom home on the 20th floor for 1.8 million pounds ($2.44 million), more than 22 percent less than they agreed to pay for it in 2013.

Also Bloomberg has missed the currency angle as if the investor is from Asia there is likely to be a currency related loss to add to this.

Comment

Actually the main trend in the UK housing market has been something of a realignment of house price growth with both wage growth and economic growth. That is good although things not getting worse is different from things getting better. As any sustained surge in wage growth has escaped us in the credit crunch era as we mull it rumbling on at circa 2% per annum it means that more affordable homes requires lower house prices which of course is the opposite of official policy.

As for London it is being affected by international trends where capital cities are now seeing house price falls rather than rises. There will still be overseas buyers but fewer of them and thus some air seems certain to come out of the bubble. There is still an extraordinary dislocation between current prices and the finances of the vast majority of Londoners.

Philippe Coutinho

Football fans like me were subject to another burst of transfer fever over the weekend. But there is an economic effect and if we look at the initial payment of around £106 million then there are clear effects. Firstly a boost to UK exports and thereby to economic output or GDP ( Gross Domestic Product) accompanied by a boost to the exchange rate against the Euro. Over time there will be a smaller flow in those directions as the amount heads up to a maximum £142 million. In addition to this there is presumably also a boost to GDP by the purchase of Virgil Van Dijk for around £70 million by Liverpool as they spent some of the expected proceeds.

Such numbers are always estimates in the football world  but I am intrigued how the national accounts will account ( sorry) for this, as for example do they deduct the price paid by Liverpool for Coutinho? I cannot move on without pointing out that there are clear signs of inflation here as whilst Countinho has improved as a player at Liverpool not by anything like the price change.

Also whilst I am on sporting matters congratulations to Australia on their Ashes victory.