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Environment / Climate change

Here’s why the London housing market might have peaked

I’ve thought for some time that London’s recent housing boom was approaching its conclusion. Property consultants have told me the market has stalled; significantly richer friends reported seeing houses vanishing from Zoopla, the property listing site, only to return, days later, at a lower price.

Then last week I received a press release from London Central Portfolio which begins as follows:

“Contrary to reports that investment demand in Prime Central London residential has dissipated … global appetite continues to increase… Property prices also continue to rise but with no sign of a so called ‘bubble’.”

London Central Portfolio is an investment firm that exists entirely to pour money into central London property. In previous press statements it’s warned that the government was ignoring a “housing crisis”; but it didn’t mean the one we’re all familiar with, it meant the urgent need to reduce stamp duty to ensure that prices continued inflating.

Consequently, when the firm claims that there is definitely no slow down underway, it’s hard to read it as anything other than a sign of panic that there is.

And lo and behold, here it is. This August, according to a survey by Rightmove, asking prices in London fall for the third month in a row. Prices generally drop in August (summer hols, and all that), but it’s normally by an average of 1.6 per cent. This time they dropped by a record 5.9 per cent. That’s larger than the drops in the last two months, and was a major contribution to the fact that prices nationwide are now down nearly 3.7 per cent on their peak last June. Here’s a graph:

These numbers are asking prices, not selling prices, of course. All the same, as Miles Shipside, a Rightmove director whose commentary accompanied the survey, said: “New seller asking prices are good lead indicators of the current mood of the market.”

London is still suffering from a horrendous shortage of houses, of course. So why would prices have stalled? There are, best we can tell, at least four reasons:

1)      The number of properties coming to market is up 20 per cent on the same time last year. So, more supply.

2)      Against that, there’s less demand. Lots of people still want to buy homes in London, of course; but I want my own Greek island, and that isn’t happening either. As prices get higher, more and more people find they can’t afford to buy. And so, they don’t.

3)      It’s not just buyers that are in short supply, it’s debt for them to buy homes with. Earlier this year, new rules came in requiring mortgage lenders to pay more attention to borrowers’ income, outgoings and the impact that rate rises would have, before they handed over any money. As a result, even those who are still determined to buy are finding themselves more constrained than they were before.

4)      Oh, and interest rates definitely are going to go up. We may not know when, but as the economy returns to something approximating health, it’s looking increasingly like it’ll be “soon”. That means less willingness among buyers to take on huge debts, and more desire among sellers to cash in before that happens and prices drop.

In other words, the expectation that prices are about to drop makes it more likely that they will. It’s an exact inversion of the dynamic of irrational exuberance that inflates property bubbles in the first place.

It’s probably too early to say whether London’s bubble actually is bursting, or whether this is merely a summer blip. ONS figures released today suggest that sale prices for London as a whole were up 19.3 per cent in the year to June, leaving the average price within a whisker of the half a million mark.

Another extract from the Rightmove report. Prices are down all over London.

Now this figure doesn’t include most of the period in which asking prices have gone through their wobble – but unlike Rightmove’s figures, these are actual selling prices. More to the point, the property market is driven by sentiment, and numbers like that can have a very real impact.

Even if a mini-crash is underway, however, it’s extraordinarily unlikely to make London property more affordable in the long run. We still have too many people and not enough homes; mortgage lending is still getting tighter; and any dip is likely to mean opportunistic buyers piling in and pushing prices up again.

There remains a widespread belief that, in the long term, prices will always go up. That makes London property a helpful reserve currency for both buy-to-let investors and the type of people who hand over their money to London Central Portfolio. As long as that’s true, the trend towards terrifyingly high prices seems very unlikely to change.
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