London Housing Bubble Melts Down

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But don’t just blame Brexit.

In Central London – the 30 most central postal codes and one of the most ludicrously expensive housing markets in the world – eager home sellers are slashing their asking prices to unload their properties. But even that isn’t working.

In the 12 days after the Brexit vote, cuts to asking prices have soared by 163% compared to the 12 days before the vote, according to the Financial Times. Yet sales have plunged 18% from before the Brexit vote. Sales had already taken a big beating before then and are now down a mind-boggling 43% from where they’d been a year ago!

So Brexit did it?

Um, well, sort of. But it’s more than Brexit. Home prices on a £-per-square-foot basis had peaked in Q2 2014, according to real-estate data provider LonRes. Since then, the market in Central London has been hissing hot air. By Q1 2016, prices for homes above £5 million had dropped 8% from their 2014 peak, and prices for homes from £2 million to £5 million had plunged 10%.

Back in December 2015, we reported that luxury housing in London was getting mauled, based on the LonRes report for the third quarter, released at the time. It pointed the finger at folks who, once “awash with cash, don’t have as much to spend” [read…  It Gets Ugly in the Toniest Parts of London].

Then, in its spring review, LonRes called the prime London housing market “challenging.”

It wasn’t just the Brexit referendum and the new stamp duty – In 2014, a change in the stamp duty made buying high-end homes more costly; and in April this year, an additional duty was imposed on purchases beyond a primary residence. Now there’s a third reason, and it originates deep from the bowels of the UK economy. LonRes:

A third is now making itself known to us as it is not something that the chancellor can bury any more. This is the balance of payments which ran at 5.2% of GDP last year and was the largest annual deficit since records began in 1948.

If measures are not taken to bring this under control, then the mini experiment to deflate the London property bubble will seem small change compared to the £32.7bn deficit that exists.

The London residential market has undoubtedly slowed, and this is impacting prices. No one will disagree that London’s prime market needed the steam to be released from it. My guess is that this slower market will be here for some time.

And not just in London…

Last week, the Royal Institution of Chartered Surveyors was spreading gloom with its residential market survey of the UK, conducted after the Brexit vote, that found, as the Telegraph put it, “The number of people wanting to buy a house has fallen to the lowest level since mid-2008 amid post-referendum uncertainty.”

Lucian Cook, head of residential research at Savills, told the Telegraph:

“The current month’s figures suggest countrywide impact on sentiment which is to be expected. However previous months’ results would indicate that a slowdown in London has been on the cards for some time. It looks like the Brexit vote may be the trigger for this to materialize.”

Now all hopes are once again centered on foreigners and their money to bail out the housing bubble before it completely implodes. But this time, it’s different, as they say at the worst possible moment: it’s not the Russians or the Chinese, but people whose investments and incomes are in currencies linked to the US dollar. Over the last 12 months, the pound has lost about 14% against the dollar, most of it since the Brexit vote, which would give these folks an additional discount on UK real estate.

The Financial Times expressed those industry hopes, and its new saviors, citing Anthony Payne, managing director at LonRes:

“We have heard that quite a number of Middle Eastern buyers have been coming back into the market. A lot of them are converting from dollars, and together with any discount they get [plunging prices], the saving in the actual price is quite substantial,” said Mr. Payne. “Some people are concerned by Brexit – others see it as an opportunity.”

London isn’t the only ludicrously overpriced housing market, where prices, once helped along by foreign money, are skidding. And now the industry is hoping for more foreign money to wash ashore, just when the Chinese, by far the largest group of investors in the US housing market, are getting cold feet. Read…  Is this What Hit Housing in San Francisco, Manhattan, and Miami? Suddenly, Foreign Investors Pull Back

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  17 comments for “London Housing Bubble Melts Down

  1. Chicken
    July 18, 2016 at 4:00 pm

    It’s nice to hear for once, someone besides me overpaid. And I can’t think of a nicer group of people who desperately needed somewhere to stash their insane windfall, how thoughtful and generous of them all, for running up prices.

  2. michael
    July 18, 2016 at 5:33 pm

    Not only do they get to overpay they get to pay taxes on that “value”. Its a win win for the tax man. Look to Illinois for the tax model

    • nhz
      July 20, 2016 at 5:28 am

      are you sure? my understanding is that most of the foreign elites are not paying any taxes, or only very little. And if the value of their RE plunges, it wouldn’t surprise me if the bank (= the tax payers / savers) get stuck with the bad loan. Fortunately some of them pay the full amount cash ;-)
      Most of these purchases are probably not ‘private’ but handled through entities that can vaporize in a moment.

  3. Uncle Frank
    July 18, 2016 at 5:47 pm

    It’s contagious…

    Luxury home sales plunge in Long Island’s tony Hamptons

  4. interesting
    July 18, 2016 at 6:48 pm

    once the tide goes out on bubble 2.0 i can’t wait to see what skeletons have been lurking in the closet. And it has peaked, i can tell by the troll posts on some the RE blogs i frequent. Of course we will get the usual misdirection from the “experts” on how nobody could have seen this coming.

    Also, can the FED save the housing market again? Even if prices get cut in half from here they are out of reach for most millennials….and well me to actually.

    • OutLookingIn
      July 18, 2016 at 10:44 pm

      “out of reach for most millennials”….
      Exactly. That’s why most don’t care about house prices, or what they are doing. Since most have given up on the house and white picket fence dream.
      What they do really care about, is the rent rate and if its going to go up. Rest assured there will be no housing bubble 3.0 the upside down, crazy housing manipulation has driven a stake through the heart of the “American Dream”.
      It will remain so for at least one or more generations.

    • VK
      July 19, 2016 at 5:18 am

      Yup. Me three. That’s why universal basic income is the only way the capitalist ponzi will survive. A form of people’s QE, pension schemes are going to fail because stock gains and bond yields are going to be nowhere close to enough to meet all the obligations outstanding. While for millennials just getting a step on the ladder is a huge issue – Sky high property prices, poor to non-existent wage growth, much decreased productivity growth (gee, wonder why? When the best brains in the world are playing financial video games on Wall Street or the city or working on advertising and distractions in Silicon Valley) as well as high levels of debt. How are companies going to make money of millennials to transfer their incomes to pensioners when millennials are largely scraping by?

      The only conceivable answer without a resort to violence is a universal basic income, where people’s incomes are directly supplemented by the government. That’s the only way governments will remain standing, otherwise pensioners will revolt at the ballot and millennials quite possibly in her trenches as they see their futures going down in flames. Already we see the rapid rise in nationalism and populism as the elite centre isn’t listening and is busy screwing society over for personal gain. A universal basic income should be linked to productivity growth and population growth and other metrics to prevent “hyperinflation” but it is workable and all other forms of current welfare can be removed once a UBI is in place.

    • nhz
      July 20, 2016 at 5:35 am

      Unaffordable homes, how is that possible with mortgage rates close to zero and all central banks on the path to negative rates (including possibly negative mortgage rates)? I guess the US and UK elites could learn from the Netherlands, there are so many things that can be done to hook a new generation to the national housing bubble Ponzi …

      We now have 103% mortgages, sub-1% mortgage rates, full mortgage cost deduction from income tax, endless subsidies and guarantees for homeowners, sky-high rents, etc.
      On top of that, ‘only next year’ parents can donate 100.000 euro tax-free to all offspring on the condition that they use the money to buy a home. Experience show that such policies become permanent because they work so well (= no need to pay any taxes for the Dutch elites, transfer all you equite taxfree to offspring and invest in real estate, and help to drive up prices even more).

      If those policies are not yet used in your country, the bubble probably isn’t over yet …

  5. rich
    July 18, 2016 at 8:42 pm

    “London isn’t the only ludicrously overpriced housing market, where prices, once helped along by foreign money, are skidding.”

    No price skidding in this ludicrously overpriced housing market:

    Today, Honolulu Board of Realtors put out the stats for the month of June. Here are some key points:

    1. $760,000 Median Single-Family Home Price up 8.6% change from a year ago in 2015

    2. $405,500 Median Condo Price up 19.8% from a year ago in 2015

    3. Single-Family Homes Sales: 324 Closed Sales in June

    4. Condo Sales up 10% over June of 2015, Closed Sales at 548

    5. Days on Market Single-Family: 14 Days

    6. Days on Market Condos: 20 Days

    Or in Stone Harbor, NJ, where the average home price is up 5.6% yoy, to over $1.3 million.

  6. Kreditanstalt
    July 19, 2016 at 12:45 am

    I’ve already wasted a lot of breath trying desperately to tell “Remain” supporters that ‘Brexit’ was merely a small catalyst.

    The UK economy has been hollowed out and loaded with debt and is horrendously unproductive, with a vastly overvalued currency. Has been for decades…

    • VK
      July 19, 2016 at 5:09 am

      All true but don’t underestimate the U.K.’s global brand value to help it out. It has THE premier global city in London, some of the world’s best universities, the BBC is one of the most trusted media institutions globally as well as British culture having a global influence amongst all its previous foreign colonies, think of the soft influence of the English premier league as well as Top Gear. And the U.K. has always paid its creditors going back hundreds of years. There will always be people interested in investing in the UK.

      • nhz
        July 20, 2016 at 5:38 am

        the BBC the most trusted media institution, Top Gear as an asset …

        you must be joking :-)

  7. DrK
    July 19, 2016 at 8:36 am

    Wolf – I discovered your blog nearly a year ago and I find your analysis the most useful out of the many financial blogs I have read. I am a lay person and have no background in finance or economics, but I always find your analysis to be comprehensive, relatively non-biased and easily understood. I’m wondering how you make money. I’d like to support you with a small donation. Thanks!

    • July 19, 2016 at 9:03 am

      Ha, excellent timing, DrK!

      First, thank you for your very kind words. It warms my heart to know that you like what we’re doing and that it matters to you.

      “Excellent timing,” because just YESTERDAY, upon being urged for years, I finally created a way to donate. So as of yesterday, there’s a “How do Donate” tab in the navigation bar. The page also tells you the story of why I just added the tab. The “Donate” button on that page takes you to WOLF STREET’s PayPal page. You can use PayPal or a credit card.

      If you’re using a smartphone, the navigation bar may not be fully visible, so you can just go here :

      Thank you so much!!!

      • Captain KurtZ
        July 19, 2016 at 1:15 pm

        Great job, Wolf. Really good writing, still focused on the economic markers of inequality that will split this country, and the world apart.

        By showing us what the .1% spend their ill-gotten gains on, it shows the mal-investment that has reigned since the FED took its rates to zero and opened their vaults to the same club members that sunk the ship in 2008-9.

        What horrifies me is that, if these same folks who got a bite at the apple for the fourth, or even fifth time, since Greenspan starting blowing these credit bubbles, and this is all they came up with, heaven help us…..

        Three Nasdaq and housing bubbles….. Same as it ever was!

        Now that we have finally reached Peak Debt, what next?

        They haven’t even a thought about what the economic landscape might look like after the DB 777 trillion swap meet comes to an end?

        Silence, then chaos, blood baths, nuclear fire-storms, then ash-filled winters…..

        That is maybe why these billionaires are in a rush to get into space, bubble-guppies like Paul Allen, who actually believe that there is a Star Trek like future off this planet, for he and a few of his Vulcan buddies.

        They have thought through the doomsday scenarios…. and all they know is they gotta go.

        Of course they know nothing about space – its not Star Trek out there,….

        It would be like Alien…… Cold, boring, with epic long periods of hibernation, and a merciless monster lurking….. like space itself.

  8. Petunia
    July 19, 2016 at 1:13 pm

    I know one of the big corporate renters is on its way to implosion. I read somewhere that they are now providing financing to renters to buy their houses. These houses are overvalued and badly maintained. Unfortunately, I experienced this first hand. After one year I never want to have anything to do with a big corporate landlord again.

    There is no authority out there overseeing the next wave of defaults this is surely to create. These companies are now setting the prices and the financing for their houses. The new “owners” are not only getting a bad deal, they are one big repair away from being homeless.

    We need a national renters protection law because the states are doing nothing to protect the public from the corporate landlords.

  9. Vespa P200E
    July 19, 2016 at 3:28 pm

    I think the housing bubble is about to pop even in the red hot SF bay area.

    Houses were going pending within days of listing in my development this past spring so expected hot summer market starting mid June when the school got out. But the market stalled in last 4 weeks with houses not going pending. We were “lucky” to sell our house a month ago. Based on Nextdoor website’s new neighbor welcome notices it seems like most of the house sold in my and adjoining developments in last couple of months including the family that bought our house are overwhelmingly Indian sounding names. We received 2 offers and they were both Indians.

    My agent and the agent for out rental nearby who is Chinese said the Chinese money dried out this year due to RMB depreciation and harder to get the money out. It just may be the new crop of buyers are getting tad nervous and may fulfill the greater fool theory.

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