The train crash waiting to happen in new-build property

I read a stat in the FT yesterday that absolutely blew my mind.

There are now 54,000 homes planned or under construction “in the priciest areas of the capital”. Most will cost “close to or above the £1m mark” and most are two-bed flats.

Here’s the mind-blowing bit: in the same areas last year, just 3,900 homes were sold for more than £1m.

That would put potential supply at almost 14 times annual demand.

Welcome to the train crash about to happen that is high-end, new-build property in London…

Who’s going to buy these flats?

I should say, not all of the 54,000 properties planned will necessarily be built, and not all will come to market in 2015. (The statistic comes from data company Lonres, researchers Dataloft and buying agents PropertyVision, by the way.)

But there is still a surfeit of supply. What’s more, many of the 3,900 places that sold in 2014 for £1m or more were houses or had more than three bedrooms. What’s coming to market are two-bed flats.

I’ve been wrong on London property before. In 2007, I thought it would take a much bigger hit than it did. So I’m cautious when it comes to making bearish pronouncements.

But as I said in my New Year predictions piece, “high-end, new-build flats in London” – and I stress new builds, I’m not talking period properties – “have got bubble and pop written all over them.”

In fact, I can see so many things going wrong here that keeping my thoughts organised made this Money Morning one of the most difficult I’ve ever had to write.

Who is going to buy these properties, and who is going to live in them?

Families don’t want two-bed flats. ‘Normal’ people can’t afford £1m-plus properties. Even buy-to-let won’t work – factoring in service charges, you’d have to be taking in £40,000 a year in rent to make a £1m property worthwhile. That’s a lot for a two-bedder.

So you’re left with very successful, upwardly mobile young people in their 20s or 30s. But will that sort of person want to buy some bland new build that feels like living in a hotel? Of course not. He or she will want somewhere groovy in Shoreditch.

And like most British people, Londoners prefer period properties. They’ll buy new builds if the price is right. But it isn’t. In many areas, new builds are at least as expensive as period homes per square foot – and they come with higher service charges.

There’s only so much naive ‘foreign’ money to be had

So who’s buying? Well, as Charlie Ellingworth of Property Vision puts it, many new builds are marketed at “unsophisticated” foreign investors.

We all know how estate agents might describe a house as “spacious” (if you happen to be a mouse), or “conveniently located for the area’s boutique eateries” (above a kebab shop).

So it is with ‘prime central London’ (PCL). What those familiar with the capital see as PCL and what an agent marketing a flat to Asian buyers, who’ve never been to the UK, sells as PCL, are two very different things.

We’re talking about places like Old Oak Common on the Acton-Willesden borders, Vauxhall-Nine Elms and Stratford. These areas may have a lot going for them – but they are not PCL. Vauxhall is a convenient area – for getting to somewhere else. There are some groovy nightclubs under the railway arches, but it is not a place you go to – it is a place you go through.

Yet flats are being marketed (and, in some cases, sold) there for millions and millions of pounds.



Sorry if I’ve seemed a bit London-centric, but this is really no different to the pre-2008 buy-to-let bubbles we saw in Manchester, Birmingham and Leeds. For the most part, those ‘trendy’ city centre tower block flats weren’t bought by locals, but from investors elsewhere in the UK.

The same happened in Dubai, Spain and even parts of the US. Locals weren’t buying, foreign investors were. They didn’t have the ‘sophisticated’ knowledge that locals do – so they bought the BS. And when the crash came, they paid the price.

Forget ‘Occupy’ – this is ‘Unoccupied’

I’ve lived in London most of my life. I can remember Arabs in the 1970s buying huge swathes of South Kensington, Bayswater and Paddington. In the 1980s the Japanese came, in the 1990s the Americans. In the 2000s it was the Russians and then the Chinese.

I don’t know who’ll be next, but someone will come along. There are a lot of people in the world.

But in most cases, they actually lived in the houses they bought! That’s the big disconnect we have today. And it can’t last.

Take the recently completed Vauxhall Tower by Vauxhall Bridge. It is Britain’s tallest residential building – 50 storeys high – and it holds 223 flats. But drive past at night and there are absolutely no lights on.

This is becoming a big social problem. London property is already unaffordable for most locals. The average wage in London is just above £40,000. The average London house price is £580,000. Anger about this is mounting every day – and it only increases when people see so many flats sitting there unoccupied.

So the idea that 54,000 new-build flats are going to be flogged off to foreigners, then allowed to sit empty is just absurd.

Whoever wins the next election will have to find new ways of increasing the tax take. Some kind of property tax looks inevitable. Mansion tax or no, an easy and politically expedient target will be to tax homes that are left vacant – Islington council is already talking about it.

I’m not suggesting foreign buyers in London will disappear. They won’t. And the overseas market is affected by all sorts of factors beyond anyone’s control – the currency markets (think of the rouble), capital controls, capital flight, capital repatriation and so on.

But markets ebb and flow. The equivalent new-build-for-foreigners market in Manhattan is already seeing a marked slowdown. And the main problem is that even by the standards of London property, these flats are hugely overpriced.

The mis-selling scandals, the eventual revelations about poor build quality, the outrage at high service charges and the ‘who’s carrying the can?’ moments are all coming.

As Monty Python used to say, “Run away!”

As for the knock-on impact – new-build was something of a canary in the coalmine, anticipating the wider property crash in 2008. I’m not saying we’ll see something similar happen this time. But it can hardly be positive for pricing power or sentiment if thousands of unwanted flats end up hitting the market.

By the way, you can get MoneyWeek’s most recent analysis of the property market (both in London and the UK) as part of our current package for new subscribers – and get your first eight issues of the magazine free as well. But hurry! The offer closes at 4pm today – so act now!

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  • Mark Smith

    I think if houses and flats are built where people can be properly supported (transport, shops, leisure and of course through jobs) then if they get trashed in value by an unoccupancy/non-dom tax then the market will put them in the right hands eventually, if developers lose money so be it. But don’t put all the weight on native Brits who pay already a fortune to live in London or in stamp duty to buy

  • C Rees

    All this has been brewing since 2008…no amount of government sticking plaster QE, Help to Buy, unsustainable low interest rates will arrest an imminent nasty correction

  • Keith Barker-Main

    Too right! The towering egotist at City Hall and local planners, bedazzled by pretty pictures and empty promises, need to wake up before London is destroyed by these shonky shrines to Mammon.

  • Michael Ford

    The numbers being quoted sound a bit dubious. It will probably be years before some of these places are ready to move into. In the meantime we read in the newspapers that bankers are being priced out of Kensington by wealthy students and that there are more people who live in the country who want to retire to London. Supply and demand will determine the price. Not everything has to be some sort of dramatic crash.

    • Neil Horner

      It not as simple as just supply and demand. Houses are not a commodity that are readily tradeable. And there are many other infludencing factors that distort supply and demand, so that waht appaers to be a healthy market, in fact is not. Just to name one of the factors, availablity of credit for one.

  • R B

    What is described here is the curse that falls on places that are tax havens for the international super-rich. A similar fate would have afflicted Monaco where real estate per square meter is the most expensive in the world. It would have been impossible for Monegasques to live in their own country if it was not for the property laws that secure reasonable rents for people who have Monegasque citizenship or have lived and worked for many years in Monaco.

    The UK government has to think long and hard about housing. High property prices may suit some interest groups and may therefore be seen as vote winners by some politicians. However in the long term the existing state of affairs is unacceptable for the country as a whole. The UK should not necessarily impose property laws like the Monegasque, however something equally drastic is needed.

  • Greg

    54,000 homes planned/under construction is not a mind blowing stat at all. The target set in the London budget is 42,000 last time I checked, so for the first time in years
    that number is close to where it needs to be (even though you can probably cut
    it in half given those developments all have staggered completions). That number is really not the issue. The fact that the WRONG homes are being built is an issue. Most Londoners can’t afford a 1mm 2 bed, sure. This does not mean they won’t be sold. They are being built because developers KNOW they will be sold. You can argue they’re being sold to the wrong people. And there will come a point when developers have pushed the boundaries too far, and end up taking losses. But I don’t think 54,000 homes is a staggering stat at all. Just as I don’t think the London property market being larger than Brazil’s GDP is a staggering stat. China built more homes in only the last 12 years, than the UK has built… ever. That I find interesting.

    There’s only so much foreign money to be had? Wrong. Could the London market get to a point where foreigners buy less (for factors such as regulatory changes, for example penalising foreigners through tax etc), yes. But under the right conditions
    54,000 flats is a drop in the ocean. In Shenzen and Chongqing (cities many
    Londoners have never even heard of) more properties were built last year alone,
    never mind planned. I’m not advocating Chinese property as an investment, we’ve
    all read the stories about ghost towns over there. But the point is there is a
    lot of foreign money that can still flow into the UK. I’ve been to conferences
    in London where I was the only non-Chinese person in a room of 100. And they
    are buying London in size. Russians and Arabs generally buy prime London,
    Chinese investors are happy to buy anywhere in London. If you look at it from
    that angle, 54,000 is nothing. 54,000 properties in arguably the most sought
    after property market on planet earth, with its 7bn inhabitants.

    Anyone who wants to even attempt to understand the dynamics of the London property market should have stopped thinking about it in from a local point of view a long time ago. “I don’t know who’ll be next, but someone will come along. There are a lot of people in the world.” Very insightful. The above paragraph should answer
    that. And if the Chinese new build market really hits a wall at some point, then where is that money going to flow? Will London property with its meagre 3.5 – 4% yields seem like a good idea, in a world where 30 year JGB bond yields are negative? Quite possibly.

    I agree that on the surface 1mm pound 2 beds defy logic, and I agree that most Londoners won’t buy them, but as long as central banks around the world print money, that money has got to go somewhere. Whether or not our government is allowing the right homes to be built is another question. We have plenty of cheap land very close to London, we just don’t get permission to use it. Should the government release these vast areas and incentivize developers to build £250,000 homes for the masses? Yes, I think so. But if that doesn’t happen and developers continue to successfully sell 1mm pound 2 beds then that does not spell the end for the London property market, it just spells the end of Londoners being able to afford it.

    P.S. I hope you got permission from the folks in the photo being labelled as “unsophisticated foreigners”. If it were me in that photo, I’d be p*issed. I’m a foreigner and I like to think I know a fair bit about the market.

    • Neil Horner

      Sounds like ponzi logic to me, saying that there will always be more people to come long and buy. Its got to make financial sense, or else it is a ponzi scheme.

  • Cameron Holder

    Firstly, good analysis, can you tell Dr Matthew Partridge how to do one on property please.

    This sounds like a good development, even if it is excess supply in a very specific market. So demand isn’t there for these places, what happens next? I’m guessing the price falls until it gets into the range of the people who are looking to trade up from their first home but who don’t have a family yet so in inner London I’m guessing that’s the £700k mark (I made that figure up, feel free to correct me). What happens to inferior properties in that bracket?

    As has been said, this is not a huge amount of property stock so it’s not going to have a big impact but I’d recon it will squeeze the £500k-£750k range a bit. Still too rich for my blood but it’s a start. And I feel a bit better for Londoners.

    I totally agree with the points made that we are developing for the wrong type of market. New builds come in 2 flavours – affordable housing or ‘luxury’. Hopefully the developers get a bit of a drubbing at the top end and start building more for the middle.

  • MacFly1

    Cut your price to sell and get OUT NOW!

  • Jake Brumby

    It seems absurd for someone to buy a property and leave it empty but that’s exactly what happens in some Asian cities such as Kuala Lumpur. Investors from Malaysia & Singapore bizarrely seem unbothered about renting the place out. Having a foothold in London and the potential for capital gain is what they’re mostly interested in. Even still, its absurd.

  • John Spindler

    Anyone who talks this market up either has a vested interest or is totally out of touch with reality…or both…the Emperor is not clothed….what with Help to Buy …ZIRP….foreign speculators….think this is going to end well ?….it’s going to EXPLODE….or I should say IMPLODE…the Film Titanic…” Bruce ISMAY” quote” this ship can’t sink ! Answer : Thomas Andrews”she’s made of iron sir…i can assure you she can” She sank !

  • John Spindler

    There is the other factor nobody has considered…”Leasehold” You don’t actually own it ! Most countries do not understand what leasehold is….these foreign buyers think they “own” the properties….local knowledge that Brits have…that they don’t…

    I have never considered buying Leasehold because the concept is so FUBAR thats why foreigners don’t understand it….came from the indebted aristocracy coming up with the wheeze of selling their properties to pay their debts whilst stilll retaining ownership…of course rights to buy the freehold have changed the gme…but you try and get 252 other flats to buy the freehold…good luck with that…Leasehold sucks ! Period !

  • cmason

    With a net immigration of approx 300,000 a year of course we need more houses and flats. Many immigrants have money and are prepared to share a house or flat with dozens of others who all contribute to the payments! The reason that you see no lights is because they are on night shift and the ones left behind are in bed making more babies to add to OUR overpopulated country!

    • A Frith

      Well, it’s a theory. Immigrants living ten to a room buying £million flats.

      • John Spindler

        yeah a stupid theory !

  • A Frith

    This is reminiscent of the scandals Dominic refers to in the North, where groups of investors were persuaded to invest off plan in blocks of flats that had been overvalued by anything up to 50% by dodgy values. That subsequently proved unlettable

  • GSL

    I run along the river Thames at night and I’d agree that many homes, perhaps half, are empty.

    Empty homes during a housing crisis.

  • Backtoreality

    There is a housing shortage in London. This means that at current prices that we see today, few people can afford to buy one. The solution – build more houses!

    Perhaps the price tag of all these new build flats is too high. But this will be corrected by the market. The writer of this article is worried that demand will dry up and there will be a dip in property prices. But surely that is good news for the young, economically actively people you talk of later in the article??

    I say let it happen. When other markets recover fully, london property will become less attractive. And prices will fall. And we will go back to a state of normality. Whoever thinks they will make a small fortune now from buying a property in London for the sole intention of letting it is, frankly, an idiot.

    But we need those idiots to keep the market in check. How else would rich sellers get rid of a toxic asset and still make an overall gain? Unfortunately, it will be the idiots caught at the top of the market who will lose the most.

  • grandfather74

    I can never understand why anyone would want to live in London. I lived in Chertsey when I was first married. I now live in Scotland and can walk out of my gate and go for a walk in the hills. I find London a great place to visit for a short period but I wouldn’t want to live there. Most of it will be under water before much longer – south east England is sinking. There are jobs for normal people elsewhere in the country and housing and quality of life are much better. Move out!

    • david r

      given that most of the govt and media, and a lot of the tax revenue, is in central London, I think it unlikely that any politician would fail to do whatever is necessary to keep the flood waters at bay…
      personally I like the place – for its nightlife, culture, cosmopolitanism, vibrancy, access to countryside, convenient connections with 70 or so other countries within a direct two to four hour flight. But yes I can see the appeal of Scotland too

      • grandfather74

        It takes all sorts to make a world. Life would be pretty dull if we were all the same, with the same likes and dislikes. To each his own etc
        Good luck to those who live in ‘the smoke’. Perhaps it’s the place to be when you are young and ambitious. I’ll modify my original comment to ‘move out when you’ve reached the level you want and want to have a family and a life.’