It’ll take more than a London luxury bust to crash UK house prices

London propety development © Getty Images
The top end of the market has been hit by a series of hiccups

“Surveyors predict first house price fall since 2012.”

That’s one of the Financial Times’ big headlines this morning. Sounds exciting.

So are we finally going to get a much-needed correction in the UK’s overpriced property market, or is this a false dawn?

A coming crash or a minor blip?

Surveyors across the UK are predicting an “outright fall” in house prices for the first time since 2012, according to the latest Royal Institution of Chartered Surveyors survey.

Prices are already falling in London. The rest of Britain is set to follow.

Sounds dramatic. And it sounds promising for anyone hoping to see some semblance of normality return to the market.

Unfortunately, it also sounds rather overdone. I wouldn’t get your hopes up.

I’ll admit that it’s not like me to downplay the case for falling house prices – which I believe would be a good thing – but I’d need to see more evidence of a wider downturn before being convinced that this is the start of something bigger.

For a start, most of the weakness is concentrated in London. That makes sense, but there are quite specific reasons for this.

Luxury London new-builds in particular seem to be in trouble. They have been for a while. And no wonder. On the supply side, housebuilders seem reticent about building good quality homes for people who live and work in Britain – perhaps because there’s not enough competitive pressure on them to do so.

But at the same time, developers have been falling over themselves to build these crumby tower blocks for the global oligarchic classes. So there are a lot of them out there. More flats than oligarchs? It wouldn’t surprise me.

On the demand side, meanwhile, the top end of the market (above £1m or so) has been hit by a series of hiccups. Stamp duty has risen since December 2014, and now there’s another 3% on top for second home buyers. And the buyers themselves have seen their wealth hit by turmoil in the commodities market.

Equally, the London market is bound to be affected at the margin by foreign buyers holding off on making decisions ahead of the EU referendum (why buy now if the hype around Brexit has persuaded you that you might see a big drop in sterling that’ll make your purchase a lot cheaper in a month’s time?)

However, London – and luxury London in particular – is a very specific part of the market, being sold to a specific group of buyers. It really doesn’t matter how big a discount the developers end up offering to shift this stuff – they’re never going to fall far enough to be affordable for ordinary mortals, and as a result, they probably won’t have a knock-on effect on the wider market.

A storm in a teacup

What about the rest of the UK? When you look at the broader market, there are some good reasons for surveyors to be a bit fretful right now. But it’s largely based on temporary factors.

The rise in stamp duty on second homes pulled forward a load of demand from buy-to-let and holiday home buyers. The market roared ahead earlier this year as a result. So the period following that cut-off date was bound to show a slump in demand. Property industry people being the way they are, even a blatantly predictable drop in demand is enough to have them clamouring for help.

But at a fundamental level, nothing has changed to make a widespread crash seem likely. In fact, signs are that things are getting worse. History demonstrates that it’s the cost and availability of mortgage finance that really drives house prices in the UK. And right now, mortgage financing is becoming cheaper and more widely available.

Interest rates remain at rock-bottom levels. Competition in the mortgage market is growing again. Those aren’t the sorts of conditions that typically result in a house-price crash in the UK.

Irritating as it is to admit it, this doesn’t look like being a tipping point. It’ll take something a lot more drastic to bring some sense to our overvalued, dysfunctional property market.

I take a much closer look at exactly what could drive real change in the market in this week’s issue of MoneyWeek magazine, out tomorrow. You can subscribe now and pay just £12 for 12 issues.

  • puddingboy

    The last Bear turns Bull. Time to batten down the
    hatches.

    • Phil

      Was exactly my thinking…!

    • Nope, it’s a realisation that in the UK, more than any other country, mortgage credit and property price rises are the driver of the economy (NOT the outcome). Thus banks and government will do anything to stimulate the supply and demand for mortgages until they create a monster boom and so many bad loans that many banks need to be bailed out (e.g. the secondary banking crisis of ’73, small bank crisis of ’90 and and global banking crisis of ’08). Only at this point are prices allowed to fall for five years while mortgages are rationed and banks’ balance sheets are repaired. It is an 18 year credit cycle that has a 400 year history. A history as long as there has been private land ownership and mortgages.

      Remember the bearishness of 2002? Property prices were falling in London and flat in the rest of the country. It was all due to ignorance of how mortgage credit works in the UK:
      http://www.andrewoswald.com/docs/housingaccountancynov2002.pdf

  • Tyy Stuuii

    One point missing here is that rents are falling, and therefore, yields.

    This impacts valuations as the yield becomes too low, then btl investors would rather sell

    • For every speculator looking to sell there is a renter looking to buy and the banks and government falling over themselves to help them. Votes and short term profits don’t buy themselves!

  • Cameron Holder

    An article on housing where I actually agree with Moneyweek. Never thought I’d see the day…

  • Excellent article. The 18 year property cycle is really a mortgage credit cycle. We are approaching the mid-cycle recession that produces rock bottom interest rates (this time helicopter money and help-to-buy) and leads to a massive blow-off price boom. Only then do prices really fall (2025 to 2030).

  • Duck

    [wind]

    [clop clop]

    ARTHUR: Whoa there!

    [clop clop]

    GUARD #1: Halt! Who goes there?

    ARTHUR: It is I, Arthur, son of Uther Pendragon, from the castle

    of Camelot. King of the Britons, defeator of the Saxons, sovereign

    of all England!

    GUARD #1: Pull the other one!

    ARTHUR: I am. And this my trusty servant Patsy.

    We have ridden the length and breadth of the land in search of knights

    who will join me in my court of Camelot. I must speak with your lord

    and master.

    GUARD #1: What, ridden on a horse?

    ARTHUR: Yes!

    GUARD #1: You’re using coconuts!

    ARTHUR: What?

    GUARD #1: You’ve got two empty halves of coconut and you’re bangin’

    ’em together.

    ARTHUR: So? We have ridden since the snows of winter covered this

    land, through the kingdom of Mercea, through–

    GUARD #1: Where’d you get the coconut?

    ARTHUR: We found them.

    GUARD #1: Found them? In Mercea? The coconut’s tropical!

    ARTHUR: What do you mean?

    GUARD #1: Well, this is a temperate zone.

    ARTHUR: The swallow may fly south with the sun or the house martin

    or the plumber may seek warmer climes in winter yet these are not

    strangers to our land.

    GUARD #1: Are you suggesting coconuts migrate?

    ARTHUR: Not at all, they could be carried.

    GUARD #1: What — a swallow carrying a coconut?

    ARTHUR: It could grip it by the husk!

    GUARD #1: It’s not a question of where he grips it! It’s a simple

    question of weight ratios! A five ounce bird could not carry a 1 pound

    coconut.

    ARTHUR: Well, it doesn’t matter. Will you go and tell your master

    that Arthur from the Court of Camelot is here.

    GUARD #1: Listen, in order to maintain air-speed velocity, a swallow

    needs to beat its wings 43 times every second, right?

    ARTHUR: Please!

    GUARD #1: Am I right?

    ARTHUR: I’m not interested!

    GUARD #2: It could be carried by an African swallow!

    GUARD #1: Oh, yeah, an African swallow maybe, but not a European

    swallow, that’s my point.

    GUARD #2: Oh, yeah, I agree with that…

    ARTHUR: Will you ask your master if he wants to join my court

    at Camelot?!

    GUARD #1: But then of course African swallows are not migratory.

    GUARD #2: Oh, yeah…

    GUARD #1: So they couldn’t bring a coconut back anyway…

    [clop clop]

    GUARD #2: Wait a minute — supposing two swallows carried it together?

    GUARD #1: No, they’d have to have it on a line.

    GUARD #2: Well, simple! They’d just use a standard creeper!

    GUARD #1: What, held under the dorsal guiding feathers?

    GUARD #2: Well, why not?

Merryn

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