Property prices in London fell 2.4% in June

According to this article here.

The real question is why? Despite inflation going up to 2.9%, interest rates remain unchanged. See article on this: here

The scary thing is, one of the key ways to deal with inflation is interest rates. Put simply, one of the reasons for inflation is too much money chasing a limited amount of goods. Why is there too much money? With low interest rates, people are encouraged to borrow more. So, if you normally don’t borrow and earn say £2,000/month, then you only have to £2,000 to buy goods. If you borrow another £1,000 then you have £3,000 to buy goods. The more money people have to buy goods, the more prices go up.

Put another way: Imagine an auction. If something is being sold that people really want and everyone only has £2,000. What does the item sell for? You guessed it: £2,000. If, however, people have £3,000 as per the above example, then what is the max price the item can sell for? You guessed right again: £3,000. More money = higher prices. Inflation 101.

The Bank of England is in a tough spot though. One of the key ways to grow an economy is also through interest rates. You lower interest rates to stimulate the economy. For businesses to expand, they usually need to borrow money. If interest rates are high they tend not to borrow and not to expand and may even reduce in size and lay off workers. When this happens the Bank of England usually lowers interest rates which means businesses can borrow cheaply and can expand their businesses and hire more workers.

At the moment, because of Brexit, there is so much uncertainty about the future, businesses are not in the mood to expand and everyone is tightening up. If the Bank of England raises interest rates it could push the economy off a cliff. If it does not, it can’t curb inflation which is being mainly driven by a weak pound (which has nothing to do with extra money through borrowing which is usually the culprit).

Quite frankly, I don’t think the Bank of England knows what to do which is why there are so much conflicting theories floating around.

So basically, interest rates should be going up but they can’t for political reasons.

Fun times…

 

 

The end for London property investment?

Some grim reading from Bloomberg, here

Short version: Government grabbing extra tax from buy-to-let landlords, extra stamp duty, property prices stagnating, rents dropping across greater London by over 4%.

What does this mean?

Depending on your tax bracket (the higher the worse it gets), you simply cannot make a profit by buying and renting out a property.

Where is the real problem? The average cost of a house is over 14 times the average salary in London. Look up the definition of a bubble and that is about it. Brexit is the needle that threatens to burst the bubble in a spectacular way. Time will tell as Brexit has not occurred yet.

The only thing that can save house prices is: powerful and growing economy (more money in people’s hands), more people coming to London (greater demand), continued restrictions on supply (lower supply). At the moment we have the opposite: Economy under great threat (less money), Brexit stopping the migration of people into London (lower demand), hundreds of residential towers coming onstream, more supply due to buy-to-let landlords unloading properties that are no longer profitable (excess supply). Add that the government seems intent on destroying the buy-to-let market with punitive tax measures and you cannot see a way forward for property investment, at least not for the time being. Not to mention interest rates are about as low as they can go with only one direction possible and that is up. Brexit will cause an increase in inflation, particularly with a weaker pound and if inflation gets out of control the Bank of England will have to raise interest rates to control it. That is very bad for the housing market as higher rates make owning property less affordable, with higher mortgages you need higher rents to cover the extra interest payments but as we know, rents are going the other way…

These are facts that we can’t get away from. If someone says that property prices are going to be ok then just ask them to explain which of the above factors are going to change. If they can’t then they are wishful thinkers.

London home prices down, rents down across the country

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Why is this happening? Article here and here

The londonpropertyguy’s view: A couple of reasons: uncertainty being one of them due to Brexit so people just don’t want to move house and incur the cost of doing so. But more worrying is that this may be linked to a slowdown in wage growth.

Why do wages slow down?

Usually because of a rise in unemployment. This comes from a faltering economy. When there is high unemployment, to get a job, people are prepared to accept lower pay. Equally, if you have a job, you are grateful for it and unlikely to push for a raise when the company could easily replace you with someone willing to accept lower pay.

With less money washing around, there is less money chasing the existing housing stock so prices have to adjust downwards to match purchasers’ ability to pay.

Another thing is supply. Take a look around North Greenwich and also Vauxhall. A huge amount of property is about to come on stream. Sadly, it looks like many developers started projects some years ago, anticipating business as usual (i.e. no Brexit) and now the rug has been pulled from under them. My sense is that many of them are less concerned about making a profit and more concerned about not going under. I expect large drops in asking prices just to get them sold so they can lick their wounds and head for greener pastures.

Another point is rent levels. Many of these new developments (particularly in North Greenwich) are bought as investment properties. For an investment property to make commercial sense, you have to be able to cover your bond with the rental payments from your tenant. The lower the rent you can achieve, the more of the bond you have to pay out of your own pocket. In a high growth environment, this is ok because the capital growth you get each year dwarfs the top up amounts you have to pay and you can refinance in due course releasing that equity for yourself. In the current environment, it is not ok because prices are going down, not up. To make matters worse, rents are also coming down and coupled with the second home stamp duty increase (something that was implemented assuming no Brexit) and suddenly it does not make much sense to be a landlord.

As a result, a lot of would-be investors will be dumping their investment properties which again means additional supply and this will cause prices to drop even more.

Now that France has voted firmly to remain in the EU, Britain stands alone in its negotiations with the EU. With negotiations already not looking good, look for further falls in Stirling, higher inflation, higher unemployment, lower wages… With interest rates already as low as they can realistically go, the Bank of England’s hands are tied.

Difficult times ahead.

Grosvenor property fund reports huge drop in return for London property

See the article here.

What sort of drop? 10.7% to 0.3% (yes, you read that right, 0.3%). How is the Grosvenor property fund still in business? It divested itself of the UK mostly and now invests elsewhere in the world.

Interesting Grosvenor is now focusing on building homes to rent out:

Mr Preston said: “…we’re looking at the mid market residential sector,” adding that the group is planning to build 4,500 homes across the UK. “We are doing our bit to help solve London’s housing problem.”

Well, actually, when people talk about London housing problem, they mean there are not enough houses to buy. They don’t mean there are not enough to rent. If you look closely, there are more than enough houses in the UK to house people (i.e. landlords take care of that). The issue is people want to get onto the property ladder and can’t. Becoming a tenant does not ‘solve London’s housing problem’ as Preston puts it. If anything, it makes it worse.

On a related point: I was speaking to an acquaintance who has just returned from abroad and now rents in Kings Cross. He told me that it is a bloodbath out there for landlords and revealed he negotiated £1,000 off the asking rent. I am assuming he meant the annual amount. If it’s the monthly amount then buckle up, Brexit is still to come.

 

Landlords in UK set to become corporate funds rather than individuals (Updated)

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This is according to Sky. Article here.

What does this mean for renters? One thing is that you are about to lose your power in negotiations. A private landlord with only one property really needs the monthly rent. They can’t afford to have the flat vacant for a month, let alone two or three months. That gives you some power as a tenant (particularly if you are trouble free and pay on time). Corporations are different, they could not care less. In fact, when corporates own real estate they often leave them vacant, sometimes for years.

Corporate landlords are looking for a certain percentage increase each year and if they don’t get it, they can afford to leave it vacant until they do. The reasoning is that it is better to have it vacant than let out at a low rent which they are then stuck with. When a corporate owns 10,000 flats, they don’t care if a few are vacant, it is not going to move the needle. For you, it is a matter of being booted out which is deadly serious so when they say jump, you say ‘how high?’

When it comes to negotiating, you don’t want to be negotiating with an intern running a spreadsheet who in any event, won’t be there 6 months. Which is a bit of a coincidence because if you don’t play your cards right, neither will you.

UPDATE:

It seems private landlords are a bit more savy than the government planned for. The changes that the government put through which penalised private landlords can simply be circumvented if the private landlord operates through a limited company. As a company, you should still be able to deduct interest payments from your taxable income (the ability to do this is much reduced for the private landlord) and you can deduct wear and tear.

Therefore, if you are a private landlord and don’t like the current tax set up, have a chat with your solicitor and accountant and consider setting up a limited company.

See an FT article on this here

 

Is Brexit bringing the biggest house price adjustment since the Financial crisis?

Big Ben stormBloomberg seems to think this might be the case. Article is here.

I am not so sure. From what I have read this appears to be in relation to the premium bracket, the fall of which is well documented.

In the normal housing market I think people will wait and see as if you are renting and about to buy, all signs are there for a correction. While it does not make sense to buy right now there still is structural demand rather than commercial demand (by this I mean, people want homes but not at any price). Prices are not going up and there is an outside chance of them coming crashing down, particularly if the Brexit negotiations look anything like the Gibraltar debacle.

Buying now is risky and I can’t see the upside. I would keep renting and watching. Possibly take out a pound hedge (move money into dollars) as if Brexit goes south, the pound is going with it which means you will become poorer from a global perspective.

Is there a storm coming? I think so but how big it is and whether the new look London (without its immigration lifeline) will weather it? Time will tell…

Foreigners buying up UK property and causing crisis for residents

Is this true? The Guardian seems to think so: Guardian article

It all comes down to data. We need to check how widespread this really is. If anything new is being bought up by foreigners and then left vacant… that is a problem for a number of reasons.

One of which is quality control. Recent articles have been published about the poor quality of housing produced by some of Britain’s leading home developers. The more you build for absentee homeowners, the more you don’t care about quality and the bigger this problem becomes.

Restricting foreigners from buying property in the UK may not solve the problem

The one issue I see with the Guardian article is that there is a circle here. Foreigners buy up new housing – this puts upward pressure on prices as demand exceeds supply – encouraged by the higher prices, developers build more properties – these are bought by foreigners – this puts upward pressure on prices so more get built by profit savvy developers – you see where this is going?

If the government restricts foreign ownership of property, this means foreign buyers can’t buy up new developments – this means downward pressure on prices – this means developers are discouraged from building more property – so either way, there are not going to be enough new houses for UK residents.

Do we need a bit more protectionism?

Are countries a bit like families? I mean – there are rich people that could come into your house and offer you tonnes of money for your house and furniture, plus all your kids’ toys. You have the power to say no and prevent this from happening. In effect, by doing so, you are voting for protectionism and local only ownership. Is that a bad thing? In this context, probably not. I think the answer is that in a completely global economy where there is a complete free movement of labour and capital, many will get completely marginalised. On the other hand, complete protectionism and nationalism have their own problems. A happy medium is required and that medium is always moving, a little like interest rates. There is no perfect interest rate, for capitalism to work, interest rates move up and down as required. Same with inflation. Perhaps that is true for protectionism – at the moment, at least according to the Guardian article, there is not enough. Time for change?

 

 

London rents are falling (and some renting advice)

The Guardian reports that London rents have fallen year on year for the first time in 6 years. See the article here. What does this mean in real terms? If you negotiated a tenancy today, you would agree to pay less rent than you would have if you negotiated a tenancy a year ago.

Why is this happening? Truth is nobody really knows but as always, rent is a supply and demand game so either there is less demand or there is more supply or the demand is the same and the supply is more, etc, etc.

Let’s look at what has happened since February last year (the benchmark date used in article).

  1. Increase in stamp duty in April last year meant lot of people bought houses then to tried to rent them out (read: supply increased).
  2. Brexit happened. People are thinking twice about moving to the UK and to London. Young renters are consolidating and sharing one home to save money. Practically: imagine 4 people renting a house each. That means 4 houses have been taken out of the housing supply. Now, those renters have decided to move in together to save money. This means that only 1 house is rented and the other 3 go back into the housing supply. These 3 houses are now sitting vacant. Supply exceeds demand and to attract the 4 people back into renting a house each, the rents have to come down.

What is interesting in London though is that a lot of houses and flats are owned by huge landowners who simply don’t care if their properties are vacant. They will rather leave a property vacant than agree to lower rent (regardless of whether this is the market rate). I know, I have experienced this. It is different (but only slightly) when you are dealing with a private landlord who has only one property and who cannot afford to have it vacant. They are more likely to be sensitive to market realities. Big landlords are not. So good luck renegotiating your annual lease if your landlord is one of the big ones!

Some other advice: if you are renegotiating, make sure you have another flat/house that you can move into if negotiations go badly. The reason is that your landlord knows it is a difficult and expensive process to move so he will most likely use that to try and force an upward rent review regardless of what the market is saying. If you have a cheaper flat/house you can move to (cheap enough to justify the complex and expensive process that is moving) then you actually have some power. If you don’t, get ready to sign for a rent increase even in a falling rent market.

So basically when it comes to renegotiation time, you should really approach a separate letting agent, look at what they have and start negotiations. Get it to the point where you are about to sign. This should be about the same time you are about to sign your renewal. Now play hardball with your current landlord. Explain the market realities, point out the problems with the current flat etc, etc. If he is not amenable (basically, he wants to screw you) then delay, delay and delay until you are almost at the end of the lease period. Now tell him you are moving out unless he agrees to market rate. If he says no, you sign for the other flat and move. He won’t be able to fill the flat for at least a month so will lose a month’s rent. As he realises you are not bluffing, he may well come round (win for you). If he doesn’t you are in your new flat for cheaper. All good. The one caveat is to check the contract to make sure the landlord cannot retain your deposit in these circumstances.

Huge increase in London listings that have had to reduce asking prices

See the Bloomberg article here

A couple of interesting stats: house prices in London are up 86% since 2009. The usual rule of thumb for London is that prices double every 10 years so that seems on track and nothing to be alarmed about.

Well, except for Brexit… The doubling of house prices every 10 years in London is a measure that to some degree depends on the UK being part of the EU. Would we have seen double digit growth every 10 years had the UK never joined the EU? Maybe but if you look at the state of the UK economically before joining the EU there must be some doubt. Whether this will hold going forward with the UK out of the EU (it might) we don’t know. The smart money says no. To double every ten years you need roughly 7.5% growth year on year. Assuming we see house prices in London growing at 4% post-Brexit then the numbers look interesting. A £1million house in London will grow to £1.48million if growth is 4% year on year. At 7.5% growth year on year, the number would have been just over £2million. This means everyone with a house around £1million is facing a £580 000 loss over the next 10 years or roughly £58 000 per year. Even if you halve the value of the house to £500 000 you are still talking about a Brexit cost of £250 000 over 10 years or roughly £25 000 per year. Like it or not, this could be the new reality.

See my previous articles: Brexit has not yet happened so the real upside or downside is yet to be determined.

Re the article though: price reductions in asking prices seems right and is in line with selling price drops we have seen since the referendum. Nothing new here. Essentially the story is: nobody knows what is going to happen when Brexit occurs. As such, sellers are getting nervous and trying to get out of the market, investors are no longer investing and we are sitting with a stamp duty second home punitive tax system that was set up assuming a remain vote in the referendum. As the vote went the other way, the government will have to rethink stamp duty and the tax treatment of second homes/buy-to-let as both are no longer fit for purpose.

Has Brexit made London a cheaper place to live and work in?

Evening Standard thinks so. I disagree. The ES article is here.

Essentially their argument is that because the referendum result signalled that Brexit would happen decimated the pound, London is now and awesomely cheap place to live and work in. Er… if you are paid in US dollars that is. The average Londoner is not paid in US dollars but in sterling. The threat of Brexit has caused a rise in inflation and uncertainty about jobs. For the average Londoner, London is more expensive to live and work in and Brexit has not even happened. This is a point worth clarifying: A decision that sometime in the future we might leave the EU is not Brexit. Actually leaving the EU is Brexit. You can’t look around and conclude that Brexit has happened and that the economy has not been destroyed – because Brexit is still to happen! That would be like observing someone who has decided to drive his car off a cliff but has not actually done it and concluding that driving off a cliff is not that bad as if it is, how come the car is intact? Er… that’s because it has not happened yet. Let’s wait until the decision is carried out before we decide what is good or bad.

Catchy headline for Evening Standard but dead wrong. It’s the kind of #fakenews that we see everywhere. The important thing is to answer the question: why would they print such a #fakenews headline? I will let you do that for yourself.

So to conclude: London is not cheaper to live and work in for the average Londoner after the referendum.