Don’t buy a house… you know this in your guts

Don’t buy a house now in London or in the south, said Times columnist Caitlin Moran this weekend. It isn’t a good idea and “you know this in your guts”.

I mentioned on Twitter at the weekend (you can follow me at @MerrynSW) that not everyone’s guts can take account of the effects of Help to Buy, the hangover from UK quantitative easing and five years’ worth of the lowest interest rates for 300 years. But look around London and it seems that some can.

I have a friend selling a flat on the Chelsea/Fulham border. It is wildly expensive, but nonetheless, when she put it on the market the estate agents said it would sell in seconds. That was four months ago.  The agents say they are utterly bemused and that everything else is practically selling itself. I wonder if that is estate-agent-speak for not much property in prime areas is selling actually.

The FT today ran a story on the Ukrainian and Russian oligarchs rushing to buy property in the UK in an effort to get ahead of sanctions (mainly through companies so as to preserve their anonymity). But in general it seems that foreigners buying in London have quite effective guts: last week Savills sent out a report to clients noting that prime central London prices have “flatlined” – they have risen a mere 2% in the last three months – while ‘super-prime’ houses (£10m plus) are up only 0.2%.

This, says letting agency Benham and Reeves is all about price. “Yields have been crushed” and “capital values are too high”, so foreigners are leaving Zone One to look for cheaper properties in Britain.

It isn’t just foreigners: according to Douglas & Gordon’s Ed Mead, there has also been a “cliff-like fall” in sales to banking clients – once the “vital driver for cash-fuelled high-end housing.”

The result? “Homes in certain parts of London… such as Chelsea and Notting Hill” are taking months rather than days to sell. Will that change any time soon? It could do. But as we have said here before, demand creates its own supply (and so stabilises or brings down prices). And one thing we now have plenty of is smart flats in London (see Izabella Kaminska on the matter here).

P.S A few months ago I told you here that if you were planning to sell up in London and buy elsewhere you might want to get on with it. I hope you did. According to Savills the “value gap” between prime regional markets and London is already beginning to close.

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24 Responses

  1. 29/04/2014, Boris MacDonut wrote

    Headline says don’t buy a house. Article says don’t buy a house in London or the South. I think MW said this in 2007/08 and look what happened. Prices will be going up by at least 20% in the next 7 years. That is the trend.

  2. 02/05/2014, tuesday wrote

    Merryn

    Please tell, WHY are you so attached to the nation of London property crashing?!
    I am genuinely puzzled / interested.

    It seems a bugbear for you. Is it because you have being making the prediction for so long (five years now) that you really need to have it justified at some point?

    It may well be – but think of all the lost opportunity along the way – and it would have to crash a lot (and a lot of movement of people and events be unravelled) to go back to those 2007 levels

    Also I think Caitlin owns a house in London no?

  3. 05/05/2014, Pinkers Post wrote

    Sorry Merryn, for once I disagree. The London property bubble is a myth

  4. 06/05/2014, CityFarmer wrote

    This is the kind of journalism I would expect from the Mirror, or the Sun. Not a serious periodical. “Don’t buy a house!” screams the headline…….. if you’re thinking of spending over several million pounds on a London Zone 1 house it may not be an ideal time…..goes the actual article.

    I look forward to your article on EU plans to regulate the size and shape of bannanas.

  5. 06/05/2014, Ellen12 wrote

    @ Tuesday. i can’t speak for Merryn, but I’d like to see a swift and big correction to house prices in London. Its bad enough to have the landed classes and older generation in the UK living off the work of people in London – but for half of China and Russia to regard Londoners rent as their meal ticket is intolerable.

    • 06/05/2014, Boris MacDonut wrote

      Ellen. You’d like! Since when did that cut the muster?
      The free market does not acknowledge what individuals like. London is now THE World city. It has 3 million homes and the World has 16 million millionaires competing to buy them. It is just like the 19th Century poor farmer seeking his fortune in the US midwest. Our problem is our legal system and ourt national character.We are too well known for being fair and trusted. Nobody in Russai trusts other Russians, but they do trust us.

      • 07/05/2014, Ellen12 wrote

        Our politicians would do well to remember who it is exactly that they work for. The free market, in its essence, were pirates getting on boats, kidnapping people from Africa and other far off places, and selling them to work as slaves for people who regarded the purchase of said slave as a good investment. And that, dear Boris, is the road we are on right here turning our backs of the welfare of our young families and selling their time and prospects to Chinese and Russian slave owners. And instead of gearing the so called ‘free market’ in favour of our perspective owner occupiers, we gear it towards the lazy rentier class. After all, the houses is London, or anywhere, is not an investment in itself, but only in so far as somebody else want to live there.

      • 08/05/2014, JT wrote

        This notion that rich foreigners are to blame is entirely false. Foreign buyers make up just 3% of sales overall across London.

        • 08/05/2014, Ellen12 wrote

          Look. There is clearly a gap between housing and young families and foreign speculator are a large part of that problem. You don’t say where you get this 3% figure from. Some media sources claim that foreign buyers account for 85% of all central London purchases. Assertions are easily made so they need to be backed up properly. However even 3% is too much when we have thousands of families and individuals here struggling to put down roots. Unlike these foreign buyers, these are people who contribute and pay their taxes here and deserve better terms, not worse terms, than foreign speculators. A second major part of the problem is the whole buy to let industry – a section of capitalism that does not ‘add value’ but rather takes a layer of profit by purely speculative means. The result is we have homes being used as investment vehicles, en masse, keeping prices too high for the average family. I understand that older people with cash savings are being forced into more risk situations by central bank and government and I do not really blame the small individuals who engage in BTL because the banks will rob them if they stay in cash and many see equities and the like very high risk. However, Carney and Osborne, personally, are blighting the lives and thousands of families and every year that passes, more people get dragged into the net – because they haven’t the courage to grasp the nettle and deal with this massive misallocation of resources BUT will not stand aside and let someone who is more capable of the job do it.

          Today, despite the roaring economy we are supposed to belong to, Mark Carney has decided that emergency interest rates of 0.5%, five years on, still need to be in place. He says it’s up to Osborne to deal with Help to Buy – and yesterday Osborne said it was up to Carney to deal with the overheating housing market. How do you make these men face some consequence for their inaction.

  6. 07/05/2014, Mr Tweet wrote

    Dear Boris – I think you need to bone-up on what ‘free market’ means. The housing market is where it is because of perpetual government intervention and CB manipulation. You equate ZIRP, QE, FLS, HtB, etc with a free market!!!????? The housing market is a rigged market – kick away these crutches and it becomes a very different beast.

    • 07/05/2014, Boris MacDonut wrote

      Tweet. So the 300,000 Russians and 400,000 Chinese in London are subsidised by our government are they? Nonsense. They come here due to trust and our legal system, not trivial Help to Buy schemes.

  7. 07/05/2014, mr clyde wrote

    Mr Tweet – Absolutely agree, but you didn’t mention the mother of all distortions, namely CGT relief on primary residences.

  8. 08/05/2014, tuesday wrote

    The moral points you repeatedly make about property and housing are good ones and well made. It isn’t fair. But as Clint Eastwood says to Gene Hackman in the The Unforgiven, ‘Fair’s got nothing to do with it’

    Money week is supposed to be a investment magazine right?!
    The moral argument only seems to get enlisted when it backs up certain predictions

    Is investing in BAE Systems or BAT ethically right?!

  9. 08/05/2014, CityFarmer wrote

    Just musing on the fact that as a long term MW reader had I taken there advice which has consistently been “don’t buy a house” all the way back since 2002 I’d be massively worse off over the past 12 years. It’s not just the £150,000 or so I would have paid in rent with nothing to show for it, but that fact that 12 years in I’d be halfway to having a 25 year mortgage paid off and being able to live rent and mortgage free in a property I owned outright.

    It’s not been the best advice to be honest has it MW?

  10. 08/05/2014, Marko wrote

    I actually just chickend out of selling my btl in london last week. It was agreed at a good price but I just didn’t want to be “out of the market”

  11. 10/05/2014, Tin wrote

    What price would it take for those intoxicated by the greed of housing gains to recognise a bubble? As long as prices continue to rise and talking heads speak of “supply shortage” £1m for a poorly appointed flat over a chicken shop would even seem reasonable to many.

    Property is so bizarrely out-of-kilter with long term norms, and so obviously propped up by extraordinary monetary policy/government stimulus that it’s incredible people’s its-different-this-time goggles still work.

  12. 13/05/2014, Boris MacDonut wrote

    David Smith in the Sunday Times confirmed housing is 10% below its long term trend. Only HP to wage ratio of any use is that for FTBs. No bubble.

  13. 14/05/2014, Chasbmw wrote

    There is an election next year
    We are in a typical pre election boom

  14. 15/05/2014, Realist wrote

    The trouble is, the north and south have become different planets. Here in the south east, prices are above the long term trend and the Nationwide have reported a 10.9% rise in the past year. I would say that is in ‘bubble’ territory.

  15. 19/05/2014, CaptainPeacock wrote

    @Boris MacDonut

    RE: ”David Smith in the Sunday Times confirmed housing is 10% below its long term trend. Only HP to wage ratio of any use is that for FTBs. No bubble.”

    Yea right you believe this Economics Editor? Your having a laugh?

    Fact is 95% of economics experts know sh*t and get it WRONG just like the 95% of fund managers who can NOT even beat an index of stocks…

    David Smith has NEVER, EVER got it right.
    Don’t believe me? Do some research…

    It really is best to ignore such morons.

  16. 19/05/2014, hedgie mike wrote

    I hate to disappoint some other commentators but Merryn is ABSOLUTELY 100% correct! The UK housing market (and in particular the south so far) is probably already and has been for a long time now the biggest bubble ever seen in the history of this country. The housing market is on every single measure stupendously overvalued and London if it were to come back to fair value level should fall by up to 70% in value. These values have been mainly stupendously artificially pumped up to where they are by extraordinary and politically driven Government measures including:
    The lowest interest rates in 500 years
    Massive inflationary money printing i.e. £400 Billion GBP
    Funding for Lending schemes
    Help to Buy schemes

    The big question really is when will the Government lose control of it all ..when this happens it really is Game, set and match for the biggest property lie in all time UK history….

  17. 23/05/2014, Longtermyieldman wrote

    The yields achievable on prime central London property – the likes of Mayfair, Belgravia and Knightsbridge – are at a record low level, and are declining. The cost of such property to many of the people who purchase it – foreigners – has risen substantially in the past year as many of their currencies have weakened against Sterling. I read the other day that the cost to a Russian of a given London home have risen 52 percent in a year. So I’m clear that this bubble will burst.

    Does that mean that values in the areas that wealthy Brits now inhabit in the capital (Fulham, Richmond, Islington) will also fall? And how about the places outside the M25 that they decamp to as the kids get older and they want more space – Guildford, S. Albans etc, which are also inhabited by those with decent white-collar jobs but who’ve never made quite enough to live in fashionable enclaves of the city? In my view these depend more on the policies of the people, both elected and, increasingly, unelected, charged with running the economy.

    The challenge they face is almost impossible. Raise interest rates, end Help to Buy or constrain bank lending decisions and they risk cutting the already-inadequate supply of new homes, ending any nascent feel-good factor in the many parts of London where house prices remain well below 2008 levels and condemning those areas to permanently higher levels of unemployment due to the supply-side inefficiency created by negative equity, which makes it hard for people to move to find work and mitigates against construction starts. But doing nothing could continue to fuel a bull market in much of London and the South-East that will not end well.

    I believe there is a solution to this paradox. The Bank of England should require banks to take a different approach to lending. Instead of considering primarily the affordability of loans to borrowers, based on their incomes and, now, outgoings, combined with the price of the property benchmarked against others in the area, lenders should instead consider the affordability of the mortgage in the event that lending rates return to their long-run averages.

    This is a much better predictor of whether or not the bank is likely ever to have to sell the property at a loss, an eventuality against which it should hold a capital buffer. Borrowers’ circumstances change, as do property prices. But yields are far more stable, being factors of average incomes and population levels.

    If a borrower loses his or her job and cannot find new work, one option available to the lender is to repossess it, but keep the former owner in the home, paying rent, met by housing benefit. Another is to evict them, and rent to someone else. There is no longer a need to take a capital loss.

    Such a policy would allow banks still to lend at relatively high LTVs and income multiples in the areas of the country where house prices are still well below peak levels, but would constrain lending in areas exhibiting bubble-like characteristics. Currently prime central London property yields around 2.8 percent. In places like Peterborough or Leicester it’s perhaps six percent, and in areas in the North East or Northern Ireland, nine percent. If we say the long-term average cost of capital is six percent, that suggests that London needs reigning in, the East Midlands is about right and the NE and NI have some way to go before they’ve recovered.

    A prudent Bank would phase in such a policy, perhaps by using the current yield curve two or three years out plus a sensible margin for the banks as the definition of the cost of capital. Since the yield curve edges higher with time, so would the impact of the policy.

    It also allows for individual borrowers to make their own decisions, which may differ from consensus opinion. So for instance a person who believes that property in Mayfair has further to go is still able to borrow at current prices – they simply have to put in a lot of equity capital to protect the bank in the case of default.

  18. 25/05/2014, FR-75 wrote

    “P.S A few months ago I told you here that if you were planning to sell up in London and buy elsewhere”

    I wouldn’t have mentioned that now Merryn given prices have rocketed in London since then and remained pretty stagnant in much of the rest of the UK. Ok, it is a bubble in London but they always last much longer than logic would dictate. As for buy elswhere, there won’t be a great rise in values up here until the general economy improves a lot first and banks start lending again without government subsidy. Not that a property bubble is something we would want anyway.

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