Prices in this hotbed of global wealth fall most since 2009.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
London’s property market is estimated to be worth as much as the annual GDP of the world’s ninth biggest economy, Brazil. But prices are falling.
In April they fell 1.5% year-over-year, to £636,777, according to Rightmove, a firm specialized in real estate. The last time prices fell so sharply was in May 2009, when the global financial crisis was gaining steam. The worst hit areas are London’s most expensive boroughs.
Those at the top end of the global wealth and income scale — just about the only people left who can afford to buy residential property in London these days — either have less money to spend or are spending it elsewhere. Some are even splashing it around other parts of the UK, where better value deals can be found.
For the last two years the UK’s prime regional housing markets have outperformed London’s top postcodes, as higher taxes and Brexit uncertainty have chilled the capital’s prime markets. According to Lucian Cook, head of residential research at Savills, values in the prime central London market are 13% below their 2014 peak. The main factors driving this trend include changes to UK stamp duty as well as international buyers’ increased exposure to capital gains tax and inheritance tax, leading to more reluctance in taking advantage of the weaker sterling.
Londoners have been squeezed out of the market for well over a decade. Despite belated efforts by the government to dampen overseas demand after decades of trying to lure global capital, foreign buyers have acquired as much as three-quarters of all new-build housing in London in recent years.
Much of that money is linked to suspected proceeds of corruption, according to a new report by Transparency International. The report, “Faulty Towers: Understanding the Impact of Overseas Corruption on the London Property Market,” found that 4 in 10 of the homes it assessed in 14 new landmark London developments, worth at least £1.6 billion, were sold to investors from high corruption risk countries or those hiding behind anonymous companies. Less than a quarter had been bought by buyers based in the UK.
Over 40% of luxury apartments in a tower on the Southbank, next to the London Eye, were bought by companies registered in the British Virgin Islands, one of myriad nodes in a vast, secretive financial web of UK-affiliated tax havens. Over £4 billion worth of London real estate was bought by people representing a high money laundering risk, estimates the report. The total is probably much higher. London has also become a magnet for “crisis capital,” with huge deposits of wealth fleeing insecurity overseas being invested into the capital’s property market.
A sharp drop in electricity usage in areas with a high density of foreign ownership shows that thousands of properties are lying unused for much of the year.
Inevitably, public anger is rising. In a poll conducted by YouGov on behalf of Transparency International UK, 54% of Londoners said they believe house prices are being ratcheted up by rich people from overseas cornering the high-end property market. More than 1 in 5 of respondents thought international buyers were purchasing property in order to launder money.
For most locals, owning a house in London is now an impossible dream. In parts of the capital, homes for first-time buyers might be 20, 30 or even more than 40 times their salary. Despite various government initiatives to help bridge the affordability gap, most of which have merely helped fuel demand, and with it higher prices, the number of homeowners in the 25 to 29 age bracket has dropped more than 50% 1990. According to the FT, Now more than a third of first-time buyers in England rely on their parents for financial help, up from 20% seven years ago.
For the millions of young people who do not have the luxury of relying on “the bank of mum and dad” to give them a leg up onto the property ladder, “owning a home is becoming a distant dream,” says Alan Milburn, chair of the Social Mobility Commission.
Mirroring what has happened in the New York City region over the last decade, there’s now a gathering flight out of London, says Dr Paul Sanderson, the co-author of a new report by the Social Mobility Commission. The report shows that for the first time, the number of first-time buyers receiving financial assistance in London was on average lower than the rest of the country. “I assume it’s got to the point where house prices in London are now so high that first-time buyers can’t afford it even with help,” says Sanderson. According to data from the Office of National Statistics, about 30,000 more thirty-somethings left London than arrived in 2015, an increase of 25% since 2010.
As long as London remains a thriving, open, global city whose property market continues to serve as a lucrative (and safe) magnet for the funds of the world’s wealthiest people — in 2015 there were 80 sterling billionaires, more than any other city in the world — and global interest rates remain at historically low levels, this exodus of young, local people is likely to accelerate. By Don Quijones.
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