London House Prices Are Falling – Time to Buckle Up

London house sales have fallen by a third as years of frenzied bidding come to a shuddering halt.

The capital remains expensive. Housing still costs 10 times the average salary and only 50% of Londoners own their own homes, the EU average is 70%.

Currently the rest of the UK appears to be benefiting from the lack of affordability and stock in London. Buyers are moving further out of the capital in order to secure their footing on the housing ‘ladder’… no snakes here …

Last month U.K. house prices regained their fastest pace since February. A Halifax house price survey showed a 4% price rise in the three months to September compared with the same period last year.

Long-term, a fall in London prices may be an indicator that concerns over Brexit, inflation and political stability are beginning to affect the U.K property market.

This will be a hard landing for a country that is so convinced that putting all one’s eggs in the housing basket is the answer to securing and growing wealth.

‘Global Real Estate Bubble’

Last month, UBS Wealth Management published its Global Real Estate Bubble Index. London came sixth with a score of 1.77. The group concluded that London is still firmly in bubble-territory.

Global Real Estate Bubble Index

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This suggests September’s fall in prices might be a signal that the top of the market is just behind us. This is no surprise when one considers both the known and unknown events on the horizon for the city.

Brexit is the most discussed threat. Foreign buyers are wary of what the future holds and there is anecdotal evidence that EU workers are being offered shorter contracts. Four years ago foreign buyers accounted for 82% of property purchases.

Brexit is the main stymie of political progress in the country.

Conferences, policy announcement and parliamentary discussions are dominated by how this may or may not play out. No-one knows what will happen, prompting many to feel uncomfortable with making major financial decisions.

This could go on for some time.

Meanwhile the Bank of England are tasked with sorting out the economy. They continue to encourage inflation and plan to raise interest rates. Thus devaluing the value of the pounds in our accounts and increasing the cost of borrowing.

It is not surprising, therefore, that it is not just in London that we are looking at the bursting of the property bubble.

Rest of the UK still climbing…according to some

London, often an indicator for things to come for the rest of the U.K., should be a beacon for the rest of the country’s housing market.

Halifax data shows in September house prices had their fastest annual rise since February. The year-on-year increase jumped a surprisingly large 4%.

Pundits believe this is an indicator that buyers are shrugging off threats of a rate hike by the Bank of England.

Others aren’t so sure. Nationwide’s own home price survey showed more subdued numbers (2%), suggesting there is a slowdown in house prices across the country, particularly in certain regions.

The pace of national price increases has slowed and is down from a peak of 10% in early 2016, to 4% today.

UK House Prices Change, Apr 2015 - 2017

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Despite concerns over inflation stretching affordability, mortgage approvals remain at an average pace of almost 67,000 a month, little changed from 2016.

The economist Samuel Tombs of Pantheon Macroeconomics told the Guardian that he thought Halifax was way off the mark.

“Other surveys show that the pipeline of demand is soft; Rics [the Royal Institution of Chartered Surveyors] has reported that new buyer inquiries have fallen in six of the last seven months. Real wages still have further to fall over the next six months and mortgage rates will rise soon in response to the increase in banks’ funding costs.”

Nationwide measure, Halifax measure, New official measure and Rightmove measure, Jan 2013 - 2017

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Last week Prime Minister Teresa May referred to the ‘British Dream’. Judging by Twitter few understood what she meant.

If there is such a thing it has to be the desire to own the roof over your head and then sell it at a ridiculous profit.

In the UK this comes at a serious price, but one which few of us question. Often first-time buyers have to rely on family to help, then be comfortable with a 25-year mortgage and restrict their lifestyles well into middle-age.

Ten years later they have to do it all again as a baby’s on the way, house prices are climbing and they want to climb the proverbial ladder.

Failure to do this is seen as just that … a ‘failure’.

To not pursue home ownership in the UK and in Ireland is seen as pretty nuts and irresponsible.

The problem is that in the UK, renting is enough of an incentive to put yourself in such a dire financial situation. It is very different to continental Europe. In the UK and Ireland few leases are long-term and landlords hold the majority of rights. As a result you feel very insecure in your home.

Brits and Irish want to feel financially secure. Ironically they get this security by getting themselves into hundreds of thousands of pounds worth of debt. But the ‘wealth effect’ is so desired and so encouraged by economists, that this level of debt is both expected and accepted.

The British government has encouraged this. For them this is what capitalism is all about. Home ownership and buy-to-let mortgages. But it may run people and perhaps the economy into the ground.

Consider the number of people who subsidise their lives, savings and retirement with the ‘wealth’ they have locked up in their homes. In 2015 older homeowners borrowed £4.2m a day using equity release loans as pensions are no longer covering retirement costs.

We can only expect this to get worse given the looming pension crisis.

Pensioners will be royally scuppered if they find themselves in negative equity, with no pension to support them. Especially so given a considerable number of pension funds and investment bonds rely on UK property to generate income.

Eurozone Bad Loans, Q3 2016

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