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.

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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.