London’s Deflating House Price Bubble Gets Messier

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.

What are homes & mortgages worth when push comes to shove? Read… Chilling Thing Insiders Said about Canada’s House Price Bubble

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  28 comments for “London’s Deflating House Price Bubble Gets Messier

  1. John Wayne says:

    As always, unprecendented misallocation of borrowed money results in falling prices. This time it’s global.

    Hang onto your hat cowboy because you’re in for the ride of your life.

    • alex in san jose says:

      Wait a minute Mr. Wayne (or should I say Mr. Morrison?) didn’t you always say “pilgrim”?

  2. Boo Randy says:

    Anarchist collectives are squatting in oligarchs’ vacant London mansions. How delightful for the neighbors.

    • alex in san jose says:

      Ha! I hope they get to keep it through adverse possession!

      London’s where a lot of the Russian oligarchs fled and took their ill-gotten gains, and the British (except for the British upper class, no doubt) have no fondness for them.

      The problem I personally have with “squats” is, maybe it’s only the messy ones you hear about, but they squatters never seem to take care of the place.

      • d says:

        and the British (except for the British upper class, no doubt) have no fondness for them.

        You dont understand the British upper class. They are very quiet about their dislikes.

        Did not your nanny teach you to keep your opinions (Particularly about others)to yourself.

        I can assure you they have NEVER liked the russians. Charge of the light Brigade and all that.

        “To rid the world of AH. I will if necessary, make a pact with the devil and his minions, even Joseph Stalin.” Words to that effect. Churchill.

        Whats left of the aristocracy, the Communist inspired Socialist,And hater like Gordon brown, haven’t destroyed, still think’s like that. If you work in the city you own a small property in London. Or stay at your club, and “go home” on the weekends.

  3. Boo Randy says:

    “Tumbling home sales” and “UK” haven’t been seen in the same sentence since about 2008. But I thought taking out a mortgage you couldn’t afford was a sure road to riches, since everyone knows it’s different here (fill in blank).

  4. michael Engel says:

    Do British indigenous people still live in London, or it became

    the crown jewel of West Bengal.

    • manny says:

      YES, visit any cities in the world and you’ll find the most productive peoples on the planet, Chinese and Indians thriving. glimpse of future giant china and india culture has a lot to do with economic progress. here in NY Indians own most of the motels.

    • History says:

      Yes they do, but they are enablers and servants to Russian oligarchs, chairmens of Chinese state companies, Arab sheiks and other interesting groups.

    • London Resident says:

      Yes we do but there are Mosques on every corner and Sharia Law rules. I don’t go out without my burqa these days.

      /sarc. Don’t believe the hype.

    • d says:

      London City, or greater london, very different places. Indigenous Englishmen still inhabit some areas , But not many who wants to live in so many of those places.

      To much of it outside the money points, is old and worn out pre war construction that avoided the blitz, and was to well built to be demolished in the post war slum clearances (Most of Nottinghill should have gone in the clearances, instead they got inside toilets fitted and a refurb Like most of east and west Ham that survived, and its all still standing.) post war concrete slab architecture, both of those a parts are as you say the Jewel’s of West Bengal, Africa, and Islam.

      The Ethnic makeup of london has been a shifting sand for over 2000 years the bengalis and africans and other Muslims will be absorbed over time, just as all the others have been. And the white european cultures will, asset themselves again.

      The original American Immigration model is London (Although the Americans have messed it up badly). Never forget that.

  5. nick kelly says:

    I would like to know how much of the money entering this market is Russian. There is no shortage of corrupt countries. only about a dozen of the 140 or so UN members have a functioning independent legal system.
    However not that many of them have lots of billionaires- the oligarchs.

    As we all know there is no security in being rich in Russia- at any time you may be ‘taxed’ by someone even more connected than you are- and ultimately the capo du tutti capi may himself requisition your wealth.

    It is also doubtful how long even the long suffering Russian people can put up with an ever declining standard of living. So far Putin has played the patriotism game, that spending half your income on food is somehow like suffering for the Motherland during the Great Patriotic War, but how long can this go on?
    As former minster of finance, Alexei Kudrin, joined by the current head of the Russian central bank have said: ‘there is no alternative to painful fundamental reforms’
    I suspect some of the buyers of London real estate agree, and they don’t want the pain.

    • TJ Martin says:

      Russian , Mittle European and Balkan money galore along with a whole host of others from all points of the compass

  6. michael Engel says:

    Eisenhower said in the early 50’s ( H. Kissinger : Diplomacy) :
    Europe future problems : reverse colonialism.

  7. Willy2 says:

    – In other words: those wealthy foreigners are feeling the (financial) pinch as well. And are less willing to buy expensive RE in London. Or are unable to find a “Greater Fool” who wants to pay more for that piece of RE.
    – Compare that with what’s happening in Miami. Similar/same story.

  8. rolwal says:

    Hi there,
    Shouldn’t your sentence read;
    In April they fell 15% year over year…. instead of 1.5% ?

  9. Willy2 says:

    – If you want to see whether or not houses are meant as a speculation object then walk through a neighbourhood at say 7, 8 o’clock in the evening on a say tuesday and count the amount of houses in which light is burning.

  10. SimplyPut7 says:

    Maybe hiring the Canadian as the Bank of England Governor who bailed on Canada after leaving interest rates too low for a longer period of time and causing the same housing mess in the UK as he did in Canada was not such a great idea.

    • Gershon says:

      Maybe turning over our money issuance to a criminal private banking cartel wasn’t such a hot idea, either.

    • John says:

      Yes, and maybe hiring the former head of the Israeli central bank as vice-chair of the Federal Reserve is also part of our problem

    • d says:

      Are those indians doing what the (Non Militant Muslim) indians in london are doing. Trying their hardest to pull the ladder up behind them so no other’s from the subcontinent can come and take apiece of what they have stolen from the Indigenous english people.

      In London You have first Generation Indian Muslim and non Muslim politicians, campaigning to harshly REDUCE immigration. They are a very “I’m all right Jack” people.

  11. Boo Randy says:

    A Russian oligarch just took a 52% haircut on the sale of a condo in Singapore he’d purchased in 2010. Oh dear…someone needs to let the HOOPP CEO and 321,000 Canadian pensioners know that yes, house prices can indeed drop by 50 percent or more, even in “it’s different here” hot money housing markets.

  12. JB says:

    the UK government has sanctioned this type of economic activity as other countries have . If you can’t sell your sovereign debt sell physical assets . These foreign transactions keep a demand on a local countries currency. I am sure these massive foreign purchases have kept the pound from weakening further. Also they create a much needed GDP growth via construction. Welcome to the post 2008 paradigm . Unfortunately the 99% bear the burden.
    It is a sign of the western economies decline .

  13. ru82 says:

    Is this why the SP500 is doing well even though the U.S. economy is not?

    * Strong global growth is making up for the lack of activity domestically.
    * S&P 500 companies which generate more than half their revenue overseas are posting first quarter earnings growth of 19.9 percent, on average, double that of companies that conduct a majority of their business domestically, according to FactSet.

    • Bob says:

      Regarding London property it seems quiet strange given the astronomical prices and major squalor in east and south London, How long can the Met police hold the line? Or is the smart money cashing out already and seeking safer climes?

    • Wolf Richter says:

      Earnings are merely bouncing back from terribly low levels in 2016 and 2015. Almost all of the bounce-back is due to energy companies that had huge losses last year and that are showing some profits this year. Earnings are STILL well below the 2014 level. CNBC forgets to mention that.

  14. John Doyle says:

    Heres’ an interesting article in “the Conversation” about Australia’s housing bubble and how it might deflate;

    These factors could apply anywhere.

Comments are closed.