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an offer being made on a house and the paperwork being signed, this means the Land Registry data is several months out of date, catching the last of the late spring boom.

In any case, it isn’t even that useful as an out-of-date snapshot of the London market.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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  • camholder

    So, your assertion is that prices could fall 20% on the 2007-2009 prices

    The data from the registry said prices are still rising, Nationwide says they are still rising slightly, Hometrack and Rightmove say demand is down and prices are dipping ever so slightly. And no one is postulating that this could just be a breather or that (as in every rising market) there is a pause while some profit taking happens?

    I’m eagerly saving for the day that what you predict happens but I don’t think we are there yet. The fundamentals have not changed significantly, demand still outstrips our (very constrained) supply; interest rates haven’t actually gone up; and despite the new tests for mortgages tempering them we have to remember how many properties in London are cash purchases.

    You can write the same article every week for another few years and eventually you will be right but I’d take a break until something actually happens. My money is on that happening once interest rates rise by at least 1%, we have some time to go before that day.

    • Luc

      Completely agree with @camholder.
      All over the world, the major city property prices are dramatically different from the rest of the country.
      Those who can afford London are buying so comparing prices with earnings of those who are not buying London is probably a weak indicator. It may be a warning sign, but the market can keep on this upward trend for a very long time under those conditions.
      I think the context of the current trend suggests a strong market for many more years to come.
      The London property market is also much more resilient now than in the past because there are far more landlords ready to buy on any dip.
      There are no signs of government creating large amounts of new housing stock and thereby lowering rents.
      Europe is not thriving so we can expect more inward migration from there. If the economy does well, maybe there’ll be slightly fewer divorces but not so few as to have a strong negative impact on demand.

      An upward trend in interest rates has the power to reverse this property price trend; but we are no there yet.
      IMO, it is quite likely the BoE will raise rates slightly within the next year, but unlikely they will do so more than once in that time. For interest rates to trend upwards we need to see businesses and entrepreneurs investing in new opportunities; that is not happening.

      There is no reason to call it a ‘bubble’ until it actually bursts.

  • Natalie

    This has got nothing to do with the fact that it is now Autumn?

  • Boris MacDonut

    What is Matthew getting at here? London has born no relationship to the UK housing market since the Millennium. He says London is dodgy but then refers to UK fundamentals. London reflects how well the World economy is doing and how quickly other nations are developing. I do not recall London prices falling 20% in 2007. I do remember MW telling us to sell up in London in 2008 and then the prices rising 50% in 6 years.

  • Rosco

    London house prices aren’t collapsing anytime soon judging by the number of foreigners buy up properties, especially new-build flats, anywhere in the London area, not just the centre.

    Why else would London-based house builders such as Telford Homes be doing so well? Just look at their May trading update and order book to 2017 – they don’t rely on Help to Buy either. It’s a feeding frenzy, not a bubble.

    Telford Homes has been listed on the stock exchange longer than Foxtons and so is a better leading indicator of London house prices in my opinion, despite it’s smaller size. It peaked in April ’07 at around 425p before it nose-dived. Currently 400p is major resistance, indicating a possible market top or the start of the next leg up.

    Despite all the noises, interest rates aren’t going up either. It would cause instant carnage and Carney knows it. He wants to leave here with his reputation intact and his $6 million paycheck.

  • khards

    The collapse in Russian and Chinese buyers is going to take a little time to filter into Telford Homes share price as it takes a time for failed development to show in their profit figures. You can see this form the last boom when developers went bust, it wasn’t immediately apparent that nobody was buying their overpriced shoeboxes.

    Foxtons are far more visible as you only have to do a little research on Rightmove to see that they’re not shifting half the number of properties that they were and that their cash flow is about to show that it’s taking a pounding.

    • Luc

      I expect Foxtons to go bust. Their reputation as estate agents is terrible.

  • Myki

    Money Week should stay out of UK property market commentary. They’ve been calling it catastrophically wrong since 2009. Its not a market that obeys good economic or market theory. The property market is a tool used by politicians to win votes and is therefore a function of political gerrymandering.

    The government have deliberated tried to slow the market this year in order to take the brakes off and apply full throttle in the run up to the election next year going for the ‘feel good factor.’

    The elected party will then have to restrain the market coupled to naturally rising interest rates. That’s when the drop will occur

    • Boris MacDonut

      Since 2007 not 2009.

  • khards

    Myki, The Government and BOW won;t introduce any housing market stimulus before the next election as they will be called out for buying votes.

    MoneyWeek has been correct in their fundamental analysis which has not come to fruition due to government tinkering. fortunately with interest rates now at 0.5%, first time buyers at 35 years old and mortgages at 30 year terms – the market has peaked.
    There is absolutely no more room for price increases in London property or the rest of the UK.
    The London market has clearly started stall, that will turn into panic as speculators offload their investments.

    This crash will be a whole lot quicker and harder because teh main participants are non-mortgaged speculators who are able to slash prices at a stroke.
    By taking a quick look at London yields you can clearly see that speculators have only been holding as they are expecting capital gains, once the lower asking prices filter through to the main indexes the speculators will run.

    • Boris MacDonut

      khards. Moneyweeks fundamental analysis in 2008 was to panic sell in London as prices were about to collapse. They rose by 50%. That is not solely down to low mortgage rates as fewer London homes are bought with mortgages.

    • Luc

      Sellers with no mortgage can be very stubborn when it comes to accepting lower valuation of their property. They will hold rather than sell cheap.

  • khards

    For anyone in doubt about the precarious state of the London market, you just need to check the near exponential growth of unsold stock in London:

    Right move trends for postcodes around SW4 give you a great picture. 171 unsold properties in December to 505 properties in July!

    That’s a greater than 300% increase of stock in a little over 6 months!

    • Boris MacDonut

      Sorry khards but going from 171 to 505 is a 195% increase not 300%.

      • khards

        My bad – but still a 200% increase in supply in 7 months is significant, and that’s just one postcode!

        The bulls have been saying that it’s a shortage of supply fuelling price rises, but this is clearly not true.

    • Luc

      Your sample size seems too small. What has been the average over say the last 5 years? Wast 171 weirdly low and 505 still below average? London property has a bit of a Mexican wave to it; different post-codes go in and out of fashion over time.

  • Property Hedge

    Hi everyone,

    To me a question even if investors pull out of the real estate market, where they should put their cash. Is there a safe heaven at all? There are signs of bubbles everywhere. Would they invest in the real estate market of a small Central European country? e.g. Hungary? I’m an English teacher now in Hungary and I really see good opportunities here. Would English businessmen invest in Central European property to hedge their investment?

  • Am K

    Savills say that in prime central London where prices average £4 million, values fell by -4.2% in the last quarter of 2004. Matthew called it right. More falls on the way.