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.

How serious is Brexit for London property prices?

The answer to this is that nobody knows. At the moment, actual Brexit has not been priced in. While there has been price drops and falls in sales numbers due to the uncertainty of Brexit, there is a massive difference between the uncertainty of Brexit (what we have now) and the certainty of Brexit (what we will have when we know what the actual outcome is of Brexit negotiations).

Two scenarios: The Low road and the High road

The Low road

There are some that say there will be no access to the single market, that the EU will seek to punish the UK so as to prevent other countries defecting. Why would the EU do that? After all, not trading at all with the UK will hurt Europe. This is true but a sweetheart deal for the UK would almost certainly result in a break-up of the EU as other countries would want to cherry pick too. Some argue there is no win/win here, that the UK and Europe will be worse off and that punishing the UK is the lesser of two evils.

If this does happen, what does “going it alone” entail? The UK does not have a lot of bargaining power as a standalone country so the idea of being a global trader sounds good in theory but in reality, the UK’s negotiating power compared to the EU when negotiating trade agreements is much weaker, so expect weaker terms that what the UK has as part of the EU.

What does it mean for London property prices?  Put bluntly, it means complete decimation. We would not be surprised to see a 40% drop in prices across London and then very little recovery over the next 10 – 20 years. Why? Because house prices are directly linked to the economy and if the UK is punished by the EU and it can’t negotiate fantastic trade deals beyond the EU then it’s economy will only be a fraction of what it is now. This means property prices will only be a fraction of what they are now.

The High Road

There are others that say the EU can’t afford to lose the UK as a trading partner because it is too dependent on this trade to cut the UK off. If this is true then the UK should get a deal that is not that much different to what it has now.

Brexit means the UK can cherry pick when it comes to immigration. That is pretty much what the US does. They have what is called the “Genius Visa”. This simply means the brightest and the best in the world are welcome in the US. These people come in, start companies and make billions. If you are not super bright and amazing, you don’t get in. The UK could adopt a similar approach.

What does this mean for London property prices? We think they would recover and continue to rise but the rise will be tempered by the decrease in net migration. At the moment Brexit is uncertain and as such the potential for the Low Road is priced in (this accounts for drops in sales and prices since the referendum) but once the Low road is no longer on the table then that risk is removed and the prices will recover quickly.

The big question is: which way will Brexit go? At the moment, the market is leaning toward the Low road (hence the drop in prices). If it is in fact, the Low road, buckle up, we ain’t seen nothing yet.

Bovis Homes issues profit warning – 20 Feb 2017

Article is here

Bovis Homes to build fewer homes. This amid reports that house price growth is slowest in 4 years.

Takeaway: The price of new homes is dropping. This is not due to lack of demand, it is due to low selling prices.

Everyone knows there is a housing shortage in the UK and a backlog of potential buyers. The reason they are not building more homes is because they can’t sell them high enough to make the profits they need. So basically it is like a situation where the buyers are at the door of the factory wanting to buy the product the factory makes but they are not prepared to pay a price that makes enough profit for the factory so the factory does not make the product.




What will Brexit mean for rents and property prices?

As you know, rents are supply and demand. Landlords provide the supply and non-home owners provide the demand.

Net migration into the UK is about 330,000. These people need to live somewhere. Most don’t have cash to buy a house and so… yes, you guessed it, they have to rent. The current rental yields are underpinned by this net migration figure. If Brexit means cutting the net migration then for every person that does not come to the UK, the rental market softens.

This is good if you are looking to rent but bad if you are a landlord or homeowner.How will this play out? We suspect that many landlords will get out of the letting game and put their stock of houses up for sale. This increase in the number of houses for sale should cause houses prices in the UK to fall.

So, we think Brexit will cause a drop in the cost of renting but this will stabilise and hit a floor when landlords sell their buy-to-let properties which will reduce the number of properties to rent. This increase in properties for sale should cause house prices to fall although it is unclear how far.

Therefore: Brexit = lower rents and lower house prices.

The consequences of the additional stamp duty for buy-to-let properties

Fewer people are going to buy properties to let them out

Ok, that is not rocket science. Every action has a consequence. If it costs more to buy a buy-to-let property and it costs more to run one (i.e. you lose out on tax deductions for mortgage payments) then… fewer people are going to do it. Also, some existing landlords may want to get out of the market.

The consequence of this is fewer buyers which should mean lower prices or at least slowing of price rises. The prices won’t come down though because there is a huge backlog of buyers just waiting to jump into the market if it becomes more affordable.

Rents are going to rise

The downside of this for renters. With fewer properties being let, rents can only go up. Not great in London where rents are already high.

The government seems to want everyone to be able to own their own home (kind of a British tradition) but we are not sure this is the right approach. What most people really want is a sustainable life. They just thinking owning a home is the way to get there. They might be wrong. If a mortgage cripples you and means you can’t live a normal life then is it worth it? Some might argue they would rather have affordable rents that give them some disposable income for savings, holidays and some investments.

Which would you prefer? Own you own house but be cash poor until you sell your house in your mid 60’s and 70’s and hope you can enjoy the cash then or be young with some cash in your pocket and the world at your feet?

Let us know in the comments.

Does reduction of properties for sale cause prices to drop?

That seems to be the view in this article: ES Homes&Property

Does that make sense though? Prices for any asset class are predominantly driven by supply and demand. If demand stays the same, a restriction on supply will push prices up. Therefore, it stands to reason that if fewer properties are available for sale, the prices should go up, all other factors remaining equal. Prices are not going up, though… so what does this tell us? It has very little to do with how many properties are for sale.

There must be other factors at play. People are not buying property in London, even though there is a reduction in supply because they must be nervous about something. What is it? It is actually pretty simple: It is the fear that properties prices won’t grow. As we stated in a previous article, if property prices don’t go up, then property is not a good investment even at half the price (unless you take a really long term view). The key with any investment is: the price must be expected to go up.

The fact that people are not buying in certain parts of London tells you that the market view is that prices are expected to stagnate or go down. Even a reduction of properties for sale cannot save this part of the market (usually it would).

It is kind of like an auction. If nobody wants what is being auctioned, there is no bidding the price up and it just sits, unsold. That is happening to parts of London right now.

Buyers are buying though, just in other parts of London and outside of London.