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

published 9 June 2016

160609-apartments — 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?

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A coming crash or a minor blip?

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

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. Why notsubscribe now?.

John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.