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Weekend reading: London property market slowing

Weekend reading

Good reads from around the Web.

I know someone looking to buy a flat in London who was astonished last week to find his low-ball opening gambit treated with some reverence.

Earlier this year our mild-mannered friends had recounted harrowing tales of being transformed into bare-toothed gazumpers by those insidious ‘open house’ days, which were blatantly designed to game frightened buyers into bidding well above the asking price (after they’d trapped the opposition couple in the box bedroom with a strategically placed Eames chair wedged under the doorknob.)

But now? Fewer viewings, no offers, and “yes, that does sound like a reasonable position to take in today’s market”.

ThisIsMoney sees a chill is coming, and it blames democracy:

It may still be six-and-a-half months before the General Election, but the market is already preparing for its traditional slowdown leading up to polling day.

Sellers know if they do not complete by Christmas, they may be stuck with their homes until well after the election, which we know will be held on May 7.

As a result, between a quarter and a third of homes on the market today have had their prices cut, with more to come.

If you prefer to hear from the frontline rather than hacks hunting for a story, then consider this week’s update from Foxtons, one of London’s swankier agents:

Although the longer term outlook for London property markets remains positive, the market is expected to continue to be constrained for some time due to political and economic uncertainty within the UK and Europe, tighter mortgage lending markets and mismatches between the price expectations of buyers and sellers.

These external headwinds have exacerbated the rate of slowdown in sales transactions we noted at the time of our H1 results.

Market volumes in Q3 have been more in line with the first half of 2013 and we now believe that market volumes in H2 2014 overall will be significantly below levels during the same period last year.

That was enough to knock roughly 20% off Foxtons’ share price, and it had already been sliding for months beforehand.

General uncertainty

I’ve heard some hedge fund managers predicting very dire things for next Spring in the UK, and while I’m not one to spread doom they might have a point when it comes to the frothy property market down south.

Their concern is that no political party is likely to win the General Election, and that all subsequent tie-ups come with uncertainties.

In particular the Conservatives seem to be talking themselves into a position where mooting a UK withdrawal from Europe is not a bogeyman to frighten the moderates but an implied plank of their manifesto. Amongst much else, it’s hard to see London continuing to suck in capital and talent in a world where we are leaving Europe. The potential alone could put off buyers, especially foreign money.

Meanwhile Labour and the Lib Dems are promising mansion taxes, which are hardly bullish for London house prices.

Add the prospect of higher interest rates and ever-tightening banking regulations and one does wonder if the trigger is here to finally pop one of the last great pre-2008 asset booms.

Merryn Somerset-Webb thinks so. In the FT this weekend in her article “The deficit will kill the property bubble” [search result] she writes:

Sooner or later, and regardless of who wins the next election, wealth taxes in the form of property taxes are going up. […]

You might not be ready to accept this yet – but the buyers of London property clearly have.

On the other hand I’ve been short one London house for far too long, and I may be clutching at straws.

Where do you think UK property prices will go in the next 6-12 months?

From the blogs

Making good use of the things that we find…

Passive investing

Active investing

Other articles

Product of the week: ThisIsMoney argues not all is rosy with the upcoming pensioner bonds. There will likely be no monthly income option (popular with pensioners) and interest will be paid net of tax, which means non-taxpayers will need to reclaim the rest. On a brighter note, the predicted 2.8% interest rate (gross) for the one-year bond would easily beat all the current Best Buys at MoneySupermarket.

Mainstream media money

Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.1

Passive investing

Active investing

  • Why Warren Buffett was right to bail out of Tesco [Video]Motley Fool
  • Equity income managers downplay dividend gloom [Search result]FT

Other stuff worth reading

Book of the week: The Economist admits it’s “easy to get steamed up about how much executives earn” but then kicks pay reform and tackling soaring income inequality into the long grass by claiming (and I do think it’s far-fetched claim) that $10-million-a-year CEOs might run off to become hedge fund managers or even “writers” (really?) if they weren’t paid gazillions in share options. Read Michael Dorff’s new book on this subject – Indispensable and Other Myths – and you can make your own mind up.

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  1. Reader Ken notes that: “FT articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”.” []

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{ 20 comments… add one }
  • 1 Drew James October 25, 2014, 10:26 am

    Prices in London might drop but I don’t see so much happening outside. Currently got offer on 4 bed house for £180k, that still seems good value.

  • 2 Faustus October 25, 2014, 10:36 am

    There are very good reasons to hope that Merryn’s prophecy is correct – it is clear that the property market in Southern England remains horribly distorted by policies that have been designed to keep this asset bubble inflated. Cheap credit, buy-to-let mania, and some of the most restrictive planning policies in the world have all contributed, along with an economy in which private sector job creation (and consequently migration) is skewed towards London and its orbit.

    But at the same time, this has been the case for years and years, and Merryn herself has made countless failed predictions of house price falls since the financial crisis erupted. It is difficult to see cheap credit (fuelled by record low interest rates) ending any time soon, and so I suspect it will take a significant economic shock (perhaps a run on the pound as a result of our exit from the EU – an outcome which will also probably lead to the breakup of the UK) before the housing bubble significantly deflates.

  • 3 The Investor October 25, 2014, 10:41 am

    Merryn was expecting falling prices in London before the crisis, too. As indeed was I.

    The thing is a cockroach: Very hard to kill! 😉

  • 4 dearieme October 25, 2014, 12:29 pm

    “those insidious ‘open house’ days, which were blatantly designed to game frightened buyers”: oh balls, it’s how it was always done during our days in Scotland; very business-like and efficient it was, too. Our first attempt to buy a house in England was a revelation: we were astonished by how difficult it was even to see many a house that was purportedly on sale. If English house-buying customs are an insight into the English Soul, it’s a grim bloody view I must say.

  • 5 Mj October 25, 2014, 1:04 pm

    Where I live in w9 some prices have doubled since 2008 – totally crazy. A nice drop and the exit of foreign money would be great for me to dip in 🙂

  • 6 Neverland October 25, 2014, 3:25 pm

    I was in Westminster on the south bank for work this week and the number of flats being thrown up in previously down at heel pimlico and even lower at heel vauxhall is unimaginable

    Two bed flats in these crappy areas seem to start north of €\$1m

    I don’t think locals will have been buying these shoeboxes to live-in

    Still I’m sure it will all work out fine as London is a sun soaked paradise where any foreign millionaire would naturally like to have a holiday home

  • 7 Pete Armstrong October 25, 2014, 4:01 pm

    The UK property market has been impacted by some specific issues –

    1)Buy-to-let buyers – both in terms of price to buy a property and the rental market.

    2) Foreign non-resident buyers – costs of purchase should have local & foreign tariffs

    3) ‘Holiday homes’ – prevents local work living local

    Other countries have controlled these factors to the benefit of local people working locally

  • 8 Willem de Leeuw October 25, 2014, 7:22 pm

    @ Pete Armstrong: Which countries? Not EU countries I’m guessing?

  • 9 Ben October 25, 2014, 7:32 pm

    London is such a dump unless you are minted.

  • 10 agranny October 25, 2014, 8:00 pm

    On the subject of active investing : Buffett selling down his holding of Tesco, Owain Benallack seems to think that Buffett has lost faith in the supermarket chain. However, he also says that Buffett has sold down from owning 5% of Tesco to 3%. That sounds to me as though Buffett has only reduced his holding and still believes in the company. Am I right?

  • 11 magneto October 26, 2014, 12:05 pm

    @agranny
    One of Buffet’s famous sayings was that ‘there is seldom one cockroach in the kitchen’.
    If he had acted on his own saying, then he would be 0% Tesco at the first hint of trouble!
    Terry Smith has pointed out the declining ROCE over some years.
    Had ourselves been long term holders of Tesco, but being biased to income growth as investors, the dividend cut meant dropping Tesco from our portfolio, incredibly at that point we were still above water!
    Reinforces that great care is needed in tracking the key figures in the accounts of individual stocks rather than just pick stocks casually and travel in hope.
    Thank goodness for trackers (and ITs).
    No idea what is in Buffet’s mind. Can he sell such a substantial holding without depressing the price still further?
    How has he deployed the released funds?

  • 12 underscored October 26, 2014, 8:37 pm

    Property prices are held up by the British “belief” in property, contrary to all logical and rational thought (fallibility per Soros). This belief creates a reality (reflexivity per Soros). (http://www.ft.com/cms/s/2/0ca06172-bfe9-11de-aed2-00144feab49a.html#axzz3HHV3L5ZF)

    This cancer will grow and grow, strangling the host, until some shock or ruination changes this belief system. I would like to think that the ever growing portion of under 35 locked out of decent housing, no matter their salary, will eventually drive this change.

  • 13 underscored October 26, 2014, 8:38 pm

    One more – http://www.newyorker.com/science/maria-konnikova/i-dont-want-to-be-right?utm_source=www&utm_medium=tw&utm_campaign=20140519

    Humans are not rational animals with an understanding that the world gets on and works the way it does, regardless of what they think about it…

  • 14 rajkanwarbatra October 27, 2014, 1:37 pm

    Interesting comments here. It looks like most people don’t like high property prices in UK yet don’t think they would go down.
    Does it indicate an irrational belief in, irrational belief in property prices of other people?
    For me this is a danger sign. As somebody said “the bubbles go farther than any body thinks they will and once burst prices go much lower than any body would expect”
    Usually bubbles are ready to burst when most bears have lost hope.
    I personally wouldn’t buy at this time and adopt a wait and see approach.
    The other big factor obviously is interest rates. Mortgage at 3% is a completely different ball game than mortgage at 6%. On the other hand oil prices are trending down and wages are not growing. There is no impetus to push the interest rates up in next 2-3 years.
    If we do exit E.U than all bets are off but I think that is highly unlikely in any case.
    My best guess is that over next 6-12 months the prices would tend lower by 5-10%. Specially in London.

  • 15 rajkanwarbatra October 27, 2014, 1:41 pm

    @agranny Fair disclosure: I just bought Tesco so probably that colors my views.
    I admire Warren Buffet. I think along with Bill Gates he is probably the best man alive today and definitely the most shrewdest.
    Mr. Buffet has said his buying Tesco was a mistake. The question is what was his purchase price. If he bought at 50% above price today than his comment does not translate into ” buying Tesco is a mistake today” in my opinion.

  • 16 underscored October 27, 2014, 2:05 pm

    The belief in rising property prices, and rising property prices as a social good is strong in the UK. Especially among older owner occupiers.

    That it is strangling the economy, and their children is just beyond their ability to imagine. Just think, if you are in the top 1% of income you are now faced with the old engineers dilemma, any 2 of the following 3; 1. a family, 2. a pension, 3. a house.

    Most monevator readers, being sane and rational will probably choose 2 (and probably 1). Working like a dog in insecure and stressful jobs whilst still being forced to live in temporary, badly managed housing is hardly motivating. I know for me, this realisation is driving me straight towards the Early Financial Independence route ASAP and a loss of £40k tax /pa for the Chancellor. I know I am not the only one of my generation and employment status to be thinking this too.

  • 17 magneto October 27, 2014, 5:04 pm

    @rajkanwarbatra
    We have exchanged comments on Tesco before, and as noted very much admire your contrarian streak.
    The problem for us was the dividend cut. As medium term Income Growth investors we can go through any number of crises with a stock holding, and build that holding as share price weakens, provided the dividend is secure/held, and income rolls in.
    Problem today is how does an investor value Tesco with so many unknowns. Cannot see any way of measuring the value on offer.
    A holder of Tesco today may hopefully see share price appreciation, if the price is bottoming, but if further bad news arises what then, and has even the present bad news been fully digested?
    Re Buffet has he reduced to 3% to get under the radar?
    Good luck and keep us posted from time to time on Tesco and any other contrarian opportunities as they develop.
    All Best

  • 18 magneto October 27, 2014, 5:20 pm

    Getting back to house prices.

    Putting London aside for one moment, as a special case, here (again) are some samples of UK average house prices from Halifax, with inflation adjusted (RPI) over/under average valuation :-

    Dec 1986 £42,262 30% below average
    Dec 1988 £65,422 about average
    Dec 1995 £61,544 33% below average
    Dec 2007 £197,244 54% above average
    Dec 2011 £160,063 10% above average
    Dec 2013 £173,467 13% above average
    E&OE

    The problem, as we have discussed in a previous thread, is not so much with the levels of UK average house prices but rather with how average earnings are falling behind inflation!

  • 19 underscored October 27, 2014, 5:44 pm

    Prices have been driven by loosening credit, not wages.

    The decoupling of wage from the old macroprudential rules (before they knew they were macro-pru) based around single proven salary and repayment within term, to being based on fantasy (google HBOS liar loans…) joint salary on a never never repayment basis drove the economic catastrophe we are still living with in the UK. That price momentum has brought in all the Global hot money chasing price rising, helped by the laughable lack of tax and regulation in the UK, as you know, it’s not like people NEED anywhere to live when London property could instead be a global asset class.

    Still with China displaying clear symptoms (we are beyond warnings) of distress, Russian sanctions, OPEC price wars and an ever diminishing pool of dictators it may well be it seems peak global debt is upon us now.

    Like profit warnings bank runs never come as single events.

  • 20 SL October 27, 2014, 11:30 pm

    I live in one of the normal people bits of North London, still in zone 2. Prices here had been going crazy for at least a year and a bit, every time you played the game of how much, the next flat came along with an extra £25,000 on the asking price. Most were going under offer near or above asking price in a week or so. We are talking £650 to £700k for a three bed flat.

    That stopped about mid summer. Asking prices on those flats are down about £50k off their peak at the moment, and they aren’t selling in a week.

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