The truth about ‘soaring’ cash sales in the housing market

What percentage of houses in the UK are bought with cash? Housing expert Henry Pryor says it is around 40% at the moment. Capital Economics puts it at more like 35% (by comparing mortgage advances with completed sales).

But either way, as a percentage of the total number, anything from 35-40% is a very high number. The long-term average is more like 25%. So why are so many more people buying with cash now than before?

The answer is that they are not. The absolute number of people doing it is much the same as it always has been. It is just that the total number of transactions has fallen so much, that the number of cash buyers as a percentage of the total has risen substantially.

This is odd. You’d think that with house prices some 20-25% off their highs in nominal terms (and much more in many places), and with there being almost no return on cash savings, those with money to park would be pouring into property in one form or another and that the absolute number of cash buyers would be rising quite fast. That should also be the case if a good many people expect inflation and see property as an inflation hedge (it isn’t a very good one, but most people think it is).

The fact then that anyone and everyone with cash is not pouring it into property could tell us something good. It could tell us that a new national consensus is being reached – one that notes that house prices are grotesquely too high and that now isn’t the best time in the world to make large consumption purchases. All we need now is prices to fall to meet the recognition of that new reality.

The only area that comes as an exception to all this is central London house prices. I have no data on how many of the super-prime properties on the market are mortgage free (although I think a safe guess would be around 100%). But the interesting thing about this market is the high level of transactions.

A country estate agent can go weeks without selling a house these days, but if you are in the business of selling £10m-plus homes in London you are also in the money: transactions rose 63% in the three months to the end of May against the same period last year according to Knight Frank. The estate agents put this down to an increased number of listings as “sellers realise they can achieve premium prices” and to “increased confidence.”

I wonder. I spoke about this at MoneyWeek’s conference last week and it seems to me that if you are buying a £10m house in London at the moment and expecting its price to go up, you aren’t betting on the UK economy or the wealth of UK families at the high end. You are betting on continuing instability abroad (what percentage of London houses changing hands are going to those who don’t want to keep their money at home in say Greece or Egypt?) and on the pound (the lower it goes, the cheaper London houses look to foreign buyers).

You may want to bet on these things, but if you are thinking of buying a house in Kensington, you might as well know that’s what you are doing. At our conference, James Ferguson spoke after me (if you’d like to get hold of a recording of the conference by the way, you can find out more here). He showed a wonderful chart tracking house price rises in Blackpool and in Kensington. Over the long term they always converge (or always have converged). I daresay they will this time too. The question is simply whether prices in Blackpool will rise a lot or prices in Kensington will fall a lot. I know which I think is more likely.