Is London property really booming again?
Press reports and housing market pundits are proclaiming a resurgence in London property prices - but if there really is a new boom forming in the capital, then MoneyWeek editor Merryn Somerset Webb can't find it. And a new monthly survey of house price growth confirms her suspicions...
With the sun come hundreds of young men with Frisbees, mothers with Bugaboo prams (which take up far too much space), hordes of tourists hunting down the Diana fountain and altogether too many dogs. So we've started boycotting it and have found a new place to go where we are always almost entirely alone the Paddington Basin development.
Here, amid signs claiming that various releases of flats are "80% sold" and the slightly contradictory signs in the windows of the would-be shops ("retail unit to let"), we can wander along beautifully designed walkways and look at the coloured canal boats bobbing about on the surprisingly clean water. Then, when we've had enough of the peace, it's just a few minutes' walk to Paddington station for a soya latte before we go home for bathtime. No dogs, no Frisbees, no tourists and no pram competition. It's our idea of a perfect afternoon out.
But, while I love the peace of Paddington Basin, I also love the way it tells me what's going on in the London property market. The current consensus is that the boom is back. But Paddington says it isn't.
There are sometimes a few after-school teenagers smoking on the steps by the canal, but if 80% of the flats were sold, wouldn't there be a few more people about? And if the supply shortage the estate agents keep telling us about really existed, wouldn't the other 20% be sold, too? Those in any doubt about the utter lack of a property boom in Paddington need only look in the windows of the local estate agents: there appear to be hundreds of one, two and three- bedroom flats available.
Paddington clearly isn't representative of the whole city, but it doesn't operate in isolation either. How then can it be possible that house prices in London are rising, as the latest survey from Rightmove says, at an annual rate of 11.7% a year? The answer is that they are not. Rightmove is not alone in telling us London prices are rising but, like many of the other firms that offer house-price information, its numbers are not quite as straightforward a measure of prices as they look.
Rightmove includes in its survey only the asking prices of houses that have been put on its website that month (not the sale prices, however) and ignores all those put on in previous months that may not have been sold yet, or sold at a much-reduced price.
The survey therefore tells us nothing about what prices are really like, merely about what sellers and agents would like them to be like. These, as anyone who has ever tried to sell a house will know, are entirely different numbers.
So how can we know what is really happening with house prices? One way might be to look at a new index out from the property-search website home.co.uk. It is calculated using the asking prices of "the majority of the properties for sale on the open market in the UK at any one time" (about 600,000 houses and flats), regardless of when they first went up for sale.
This means that not only does it take into account more houses than any other survey, but it reflects any falls in the asking prices of houses that are not selling.
The final point in its favour is that it excludes prices above £1m and below £20,000, so as not to skew things (in effect, the price range in which most of us actually buy property, rather than the range in which Jemima Khan and a few Russian billionaires buy).
The result? According to home.co.uk, London prices are not rising but have fallen 4.1% since June last year, while prices across the nation are down 1.9%.
I know that I am uncommonly pessimistic on the housing market, but these numbers make much more sense to me.
Look at the facts. Unemployment is rising. Inflation is rising. Interest rates are more likely to rise than to fall, and so are mortgage rates.
The rising costs of utilities, services and taxes mean our disposable income is falling. The nation has well over £1,000 billion of personal debt that will need to be paid off at some point, and the Consumer Credit Counselling Service tells us the number of people calling in who owe over £100,000 and can't service their debts has doubled in the past year.
Finally, the average house is still unaffordable to those on average incomes: the house price-to-income ratio is about five times in most areas of the country.
This just isn't the kind of environment in which house prices rise. I think they are falling and I think they are likely to keep doing so. Let's not forget that the housing crash of the late 1980s and early 1990s took seven years from top to bottom.
Merryn Somerset Webb
First published in The Sunday Times (25/06/2006)