Those once “awash with cash don’t have as much to spend.”
It gets ugly for luxury homes in the toniest parts of London.
The combined value of homes that were sold in prime central London, which includes Belgravia and Chelsea, plunged 24.5% in 2015, year-over-year, to just under £3 billion, according to real-estate data provider LonRes. Prices edged down 1.4%, but transaction volume collapsed. It was even worse at the upper end: transactions of homes over £5 million ($7.5 million) plummeted 30.5%!
LonRes had already warned earlier in its third quarter report:
It was a London bubble that was threatening to undermine the UK economy, as identified by the Bank of England last year. The old argument of prevailing market conditions just being the natural forces of supply and demand doesn’t wash when the outlier, that is the massive influx of overseas investment, tips rising house prices into overdrive.
New taxes on homes over £938,000 ($1.4 million), based on changes to the Stamp Duty Land Tax system at the end of 2014, caught some of the blame. But it wasn’t the only reason, LonRes said. Other factors include the dearth of wealthy foreign buyers. Russians had been impacted by the collapse in oil prices, and Chinese had been hit by the turbulence in China. And for them, there were other uncertainties:
A popular topic at the moment is the authenticity and provenance of the money used to buy property in prime central London (PCL). To this end, HMRC [the UK government’s tax collection department] has discovered that it is entirely conceivable that some buyers may not have made their newly discovered fortunes in an entirely honest and legal manner. Only a year ago, The Times reported that London was the money laundering capital of the world, and Alexander Lebedev, owner of the Evening Standard, claimed then that £1 trillion had been stolen from Russia since 2000.
But now the HMRC wants the industry to help crack down on it, which “will make those who see London as an easy touch think again, and it is likely to contribute to a general slowing throughout the London market, where transaction levels have fallen by 25%.”
LonRes added more gems:
Increased uncertainty across the world’s financial markets has exacerbated the situation further and led to falling demand.
However, perhaps a more fundamental issue is pricing. The gap between buyer and seller expectations remains a major stumbling block, with price reductions often required to close deals – although realistic initial pricing is a better option for all concerned.
At the time, 78% of the agents surveyed by LonRes thought sellers were “being unrealistic about asking prices.”
Now, as the real-estate year has come to a close, Anthony Payne, director at LonRes, told the Financial Times:
“The top end of the market in the last few years has been reliant on foreigners, but a series of things are affecting them that are out of the government’s control – the strength of the pound, the weakness of the oil prices, the state of Chinese markets.”
“Those people who were awash with cash don’t have as much cash to spend.”
There were other problems in the expensive central areas: 37.9% of the homes sold had their prices reduced, after sellers got sufficiently desperate, up from 28.4% in 2014. On average, homes sold at 93.2% of asking price this year, down from 95.5% in 2014. And in some cases, Payne said, to make a deal, sellers had to absorb the new taxes.
Payne called it “a pause in the market,” a period during which sellers come to grips with a new reality, “that property is not where it was two years ago,” and lower their asking prices in order to be able to make a deal. Or they decide not to sell. Meanwhile, “buyers sit tight.” And the result, he said, will probably be a drop in prices.
This is how it always starts out. First, transaction volume collapses as sellers dream of soaring prices while buyers lose interest or can no longer afford them. Then, when sellers are desperate enough, or when they’re forced to sell, they will have to slash prices before buyers show any interest. Once prices start heading south, buyers adjust to this new reality. They feel they’re making money by waiting. They’re nibbling only at even lower prices. And this is how bubbles, such as the one in London’s housing market, deflate – with hot air hissing out of them for all to hear. They don’t “plateau.”
Similarly, the booming apartment sector of the magnificent commercial property bubble in the US is also struggling with an identity crisis, and industry gurus have now declared a “plateau.” But after the last time they’d declared a “plateau,” the market crashed. Read… Bone-Chilling “Plateau” in Apartment Boom Resurfaces, Smartest Money Bails Out
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.