Housing market update: testing the foundations

Credits: www.christart.com
Credits: www.christart.com

This post extends the series on the UK housing market which is one of my favourite topics, as you may have guessed by now. In earlier posts I discussed the impact of the stamp duty, clumsy real estate agent advertising and future house price trends in London. Today’s update brings a political flavour to the analysis, with Brexit as an obvious figurehead.

I think that a vast majority of industry experts would agree to state that the apparent uncertainty surrounding Brexit – although this uncertainty is largely a statistical artefact – has cooled down the real estate market. Although transaction volume is not officially monitored, this impression is supported by anecdotal evidence: estate agency Savills reported a 6.7% price drop in London’s prime residential areas compared with 2014, with more than half of homes being sold at a 10%+ discount. The momentum has started percolating to lower price layers, with inflation for homes in Central London costing £500k to £1m now standing at 3.4% over the last year. Commercial real estate is also affected, with investment in central London office buildings dropped 52% quarter-on-quarter. Some readers will recall that the market experienced similar turbulence in the weeks leading to the referendum on Scottish independence in 2014.

Nonetheless, the core of the market remains largely untouched. Prices throughout the UK in general, and in London in particular, still show vigorous growth, which tends to indicate that structural house undersupply largely remains a reality.

Mix-adjusted annual house price change by region as of Feb 2016. Source: ONS.
Mix-adjusted annual house price change by region as of Feb 2016. Source: ONS.

Brexit may come on top an artificial rush generated by the increase in stamp duty on buy-to-let and second homes, which led some investors to bring forward their purchase intent to Q1 2016, as demonstrated in an earlier post.

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Zac Goldsmith and Sadiq Khan. Credits: www.telegraph.co.uk.

On the supply side, political uncertainty also takes its toll. Brexit but more importantly London’s mayoral elections have strongly builders to ‘sit and wait’. The Financial Times reported that London boroughs approved 64% fewer homes in Q1 2016 compared with Q1 2015. This does not help.

On the investment side, strategies vary depending on the investor’s mandate. Property funds have been forced to partly withdraw from the market, sometimes crystallising losses, to face increasing outflows and form a sizable ‘war chest’ in case a major bank run happens post-Brexit – public trust in those funds took a hit when some of them had to forbid redemption during the darkest moments of the financial crisis. Conversely, more agile private investors are trying to take advantage from the current feebleness whereas more established institutional buyers’ field of action is restricted by their Boards.

1280px-Barclays_logo.svgFinally, in an environment where investment-grade bonds yield no (or even negative) interest and equity markets have struggled to find momentum, banks rely more than ever on the ‘power of the stone’ to generate satisfactory returns. Yesterday Barclays announced that it relaunched 100% mortgages, a product that got discontinued in the aftermath of the financial crisis, in a hunt for yield – fixed-rate mortgages start at 2.99%, not a bargain by today’s standards. Given that this mortgage can only be activated with a 10% deposit from a guardian, this mortgage is particularly aimed at younger buyers that recent price increases have excluded from the property ladder.

Share of borrowers under 25 within the first-time buyer population. Source: ONS.
Share of borrowers under 25 within the first-time buyer population. Source: ONS.

One cannot forget, however, that London remains one of the most expensive cities in the world, only trailing Hong Kong according to UBS’s well-named ‘Global Real Estate Bubble Index‘, which states in its 2015 edition that “the [London] housing market is in bubble-risk territory“.

Price-to-income benchmark for selected cities. Price-to-income is defined as "the number of years a skilled service worker needs to work to be able to buy a 60 sq. m. flat near the city center". Source: UBS Global Real Estate Bubble Index.
Price-to-income benchmark for selected cities. Price-to-income is defined as “the number of years a skilled service worker needs to work to be able to buy a 60 sq. m. flat near the city center”. Source: UBS Global Real Estate Bubble Index.

Monitoring house prices as the political dust settles will solve the conundrum. Only then will we indeed be able to understand if the London housing market has reached an inflection point or if the political milestones paving the first half of the year were mere bumps on the road to continuing inflation.

bubble204
Credits: http://fixingtheeconomists.wordpress.com

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