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. 

FT says London properties are bargains for foreign buyers – but are they right?

Here is the link to the  FT article

They observe correctly that prices have fallen in London’s premium sector and we discussed why that was in the previous post.

What bothers us though is that they seem to suggest that because properties have become cheaper for foreigners due to a fall in Sterling, this somehow makes the properties worth buying.

Why does this bother us? A drop in sterling is the world saying that it thinks Britain’s economy is going to struggle. As home prices don’t grow in struggling economies, the world is effectively saying that British property prices are not going to grow.

Why is this relevant?

It is relevant because of the reason investors buy property. They invest for a return and if property prices don’t go up, they can’t get a return (unless they rent it out but most luxury properties are not rented). So all in all, if British property prices are not going to go up, then how can it be a bargain? Indeed, even if prices were to halve and then not go up, would property be a good investment? No. If the price of an asset does not go up, it is not a good investment at any price.

A country’s currency is like a company’s share price. When the market thinks a company will do badly, the share price drops. When the market thinks a country will do badly, its currency drops. The FT seems to suggest that if a company’s share price goes down due to something fundamental (like Brexit) this means it is a good reason to buy. If that is what they are suggesting, we don’t agree.

Of course, the market could be wrong about Britain. It is often wrong about companies and if you know something the market doesn’t, you can get a bargain, but such an approach brings with it a lot of risk.

What a reduction in price of London’s luxury properties means for the rest of us

Unless you have been living under a rock, you will have noted that the luxury or premium end of the London property market has taken a big hit over the last year.

Why is this happening?

  • high stamp duty at the top end (£1.5m properties and up incur 15% stamp duty vs 12% pre-April 2016 if an “additional” home)
  • Regulations in China preventing the outflow of funds (some of which was used to purchase London property)
  • Sanctions on Russia preventing Russian buyers from entering the London property market
  • The oil price crash which hit the incomes for buyers from the Middle East who are large investors in London property
  • Unease over Brexit and what it will mean for the London market has meant some buyers are reluctant to enter the market and are taking a ‘wait and see’ approach. If bankers have to move from London, this will cause a glut of properties swamping the market

So what does this all mean? It means those who would have bought at the premium-level are now looking at buying in the mid-level which has lower stamp duty and is more affordable. This influx of buyers has inevitably pushed up mid-level prices.

We are also seeing price rises on the periphery of London as ‘normal buyers’ just can’t buy anywhere central anymore. As such their attention has turned to the ‘next best thing’ which is the more affordable areas on the outskirts of London. These places are not more desirable by the way. Their commute is just as bad and the amenities and local economies are as lacking as before. The only difference is the former London buyers have no place else to go. As such there have been huge rises in prices in these areas as more people fight over a limited housing stock.

What is interesting is that when buyers with more disposable income move into an area, the area changes. Boutique shops, gyms and artisan bakeries mushroom up to meet the needs of the well-heeled. While the commute is still bad, the area becomes a better place to live. As the area becomes a better place to live, more people want to move there and this drives prices up further. It is essentially gentrification. A lot of people complain about gentrification, except the existing home-owners who see the price of their home double in 5 years. Think about equity release and you get the picture.

Interesting graphic in the above article (central London prices going down and periphery prices going up like a ring of fire). Kind of makes sense, the people have to go somewhere.

So the purpose of the stamp duty increase was to cool down the property market and allow more people onto the ladder. In some way, the opposite has happened in that the mid-level has become even more unaffordable for the reasons highlighted above. Equally, those who would have bought mid-level are now looking at the lower level and this is pushing that part of the market too. With interest rates at record lows, the Bank of England is certainly not helping. Their hands are tied to some extent though as raising interest rates will cool the economy and with Brexit fall out not yet quantified, it is understandably reluctant to do that.  It may be harder than ever to get on the property ladder.

The takeaway? It may be harder than ever to get on the property ladder but if you are going to try, aim for the periphery of London as this is where you will get the most price growth, at least for now.