London’s property market is looking wobbly – is it about to topple?

We have pretty strong views on London property.

Cheap money and low interest rates – as well as an influx of foreign cash – have created a massive bubble (yet again). Valuation ratios such as prices to incomes are now at historic highs (yet again).

This can’t be maintained. Indeed, the downside from here could be huge – potentially even bigger than the 20% fall (excluding inflation) seen from the winter of 2007 to the first three months of 2009.

Yet last week’s data from the Nationwide and the Land Registry both seem to suggest that prices are still soaring higher and higher.

So does the bubble have further to go before it pops? 

The historic data still looks good for London…

If you just look at the headline figures, it seems hard to deny that the London property bubble is still going on. For example, the Land Registry reckons that prices rose by a whopping 3.3% in July.

However, it may not be the best measure of house prices in this fast-moving market. The big problem is that the Land Registry figures measure prices at the time the sale finally goes through and is recorded.

Given the amount of time that passes between an offer being made on a house and the paperwork being signed, this means the Land Registry data is several months out of date, catching the last of the late spring boom.

In any case, it isn’t even that useful as an out-of-date snapshot of the London market. Since it includes cash sales, it is skewed towards high-end properties. Indeed, if you dig deep into the borough-wide data, then excluding the City of London, the median monthly price change is a much more modest 1.5%.

Of course, data from Nationwide also suggested that prices are still rising. And this data is much more timely – Nationwide’s index takes a snapshot of the market at the time the mortgage is approved.

However, the note that followed the data was much more bearish. Robert Gardener of Nationwide thinks that “the outlook for the housing market remains highly uncertain”. He notes the number of falling mortgage approvals and the fact that “new buyer enquiries have moderated somewhat in recent months”.

He also warns that “the prospect of interest rate increases together with subdued wage growth may temper demand in the quarters ahead”.

But the more up-to-date news is grim

Meanwhile, a very different picture is given by property website Hometrack. Its survey suggests that UK-wide prices went up by only 0.1%, while those in London stayed completely flat. This suggests that the capital is starting to fall behind the rest of the UK.

Delving into the data, only 11% of London postcodes saw a rise in prices. This contrasts with nearly 90% earlier in the year. The time spent on the market has also risen – from 2.7 weeks to more than a month. And the percentage of the asking price achieved has dropped from 98.8% to 96.4%.

The director of research at Hometrack argues that there is “clear evidence of a slowdown, particularly in the London market”. What’s more, “important lead indicators in this survey are turning and pointing to a loss of momentum in house price growth”.

That’s pretty bearish. You could argue that this is just one property website against a big lender like Nationwide and the Land Registry. But Hometrack does have one big advantage in terms of timeliness, in that it measures prices when an offer is made and accepted.

This enables it to capture trends at an earlier point than other indices. And it backs up another early indicator – the Rightmove asking prices survey – which also suggests that the market has turned.

I can only speak for a small part of southeast London. But judging from my own efforts to buy a flat at a half-reasonable price, I’d suggest that the reality is closer to what Hometrack (and Rightmove) are observing, rather than the figures from Nationwide and the Land Registry.

Up until about six weeks ago, things were crazy. Prices were rising so quickly that the asking price was seen as a floor, not a ceiling. In some cases, properties were being listed on Friday and being sold come the following Monday.

However, recently owners are more willing to make concessions, estate agents have more time to show people around, and flats are lingering on the market. Meanwhile, the asking price has moved from being a floor back to its more normal place as ceiling.

I’ve also seen a few cases of a property marked as “under offer” suddenly appearing back on the market again at a lower price. This isn’t an isolated phenomenon – according to The Times, 40% of deals in the capital are falling through.

And a recent warning from estate agent Foxtons backs this up. Last week, the company saw its share price left reeling as it warned that “initiatives introduced in 2014 aimed at controlling mortgage lending, together with the expectation of increases in interest rates, are now having an impact on short-term demand among buyers”.

As my fellow Money Morning writer Dominic Frisby noted recently, Foxtons’ share price is something of an indicator as regards the health of the London market.

In short, it feels like we’ve reached a turning point in the housing market. And once that happens, past experience suggests that prices won’t just plateau – they will start to fall. Put it this way – I wouldn’t see the recent drop in the Foxtons share price as a buying opportunity yet.

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