But new high-end towers will continue to flood the market.
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
After decades of mind-boggling growth, home prices in metropolitan London, according to official numbers, started to fall this year, if barely. Between March and September, they slid 2.3%. But it’s a lot worse in the most expensive parts of the city: Prices in central London have already dropped 15% since 2014, according to James Hyman, head of the residential agency division at Cluttons. He expects another 7% drop over the next year and a half. And the total volume of transactions has fallen by a fifth, according to Residential Analysts.
In 2014, a change in the stamp duty made buying high-end homes in the UK more costly. In London, the city that hosts the highest number of super-rich individuals per capita in the world, high-end homes are the staple product. And it’s getting harder and harder to offload them: The Guardian reported that over half of the 1,900 ultra-luxury apartments built in London last year failed to sell. This freeze at the high end is fueling concerns that the city would be left with dozens of “posh ghost towers.”
The newest phantom skyscraper is London’s Centre Point Tower, a 33-story office building from the 1960s that was recently converted into multi-million-pound luxury apartments. But demand is anemic and the developer behind the project, Almacantar, has all but given up trying to sell the flats after receiving too many “detached from reality” lowball offers. Until conditions improve, half of the tower’s 82 flats will lie empty.
Yet even as demand for upscale real estate in London fades, there’s little sign of any slow down in the construction of luxury apartments, meaning there will be an even greater glut of upscale real estate in the near future. That’s likely to further exacerbate the fall in prices.
It’s the latest in a long line of reality checks for London. Clearly, those at the thin upper crust 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 on over-priced high-end London real estate or are splashing it elsewhere, including in other parts of the UK.
Predictably, Brexit is getting a large share of the blame for London’s downturn. Henry Pryor, an independent luxury property buying agent, told The Guardian that well-heeled overseas buyers were concerned about the risk of overpaying for central London properties, particularly if the economy was hit by a disorderly Brexit or if the Labour Party leader Jeremy Corbyn became prime minister and introduced a wealth tax.
UK estate agents are feeling the pain, with the largest firm, Countrywide, teetering on the brink of bankruptcy, and Foxtons, a bellwether firm long-associated with gentrification in the capital, struggling.
Besides Brexit-based fears, there are plenty of other reasons for the current market malaise, including a slew of new taxes targeting buy-to-let landlords and overseas speculators. To help local people get on the property ladder, the government has tried to crack down on buy-to-let landlords and foreign investors looking for a safe market in which to expand their global property portfolios.
And it seems to have worked — to an extent! Overseas demand for London real estate has slumped by as much as 70% since 2014, according to James Hyman at Cluttons. Yet while a lot of pent-up stream may have been released from the market, prices have still not fallen nearly enough to make London property affordable for young professionals.
For most locals, owning a house in London remains all but impossible. The cost of the average London residence is almost 14 times the median full-time salary in the city. In select parts of the capital, homes for first-time buyers might be 20, 30 or even more than 40 times their salary. Despite government initiatives to help bridge the affordability gap, most of which have merely helped fuel demand, and with it higher prices, just a third of young adults can afford to buy a house in London on a 10% deposit and a maximum mortgage of 4.5 times their salaries, says the Institute for Fiscal Studies. In 1996, 91% could afford to do so.
For many young or even middle-aged professionals, the only hope of getting onto the “property ladder” is to get a financial leg up from their parents, a luxury that’s available only to the children of relatively affluent families. Some less moneyed parents may decide to remortgage their own homes or serve as guarantors on the 100% mortgage deals that are becoming increasingly common to help their children buy their first home.
So widespread is this phenomenon that in 2017 the so-called “Bank of Mum and Dad” became the ninth largest mortgage lender in the UK, with parents helping to provide deposits for more than 298,000 mortgages — the equivalent of 26% of all transactions. But even the Bank of Mum & Dad appears to be running low on funds, with overall lending expected to drop to £5.7 billion this year from last year’s peak of £6.5 billion. By Don Quijones.
Seattle prices fall sharply. New York condo prices nearly flat for the year. First feeble declines in San Francisco, Dallas, Denver, etc. Something is afoot. Read… Declines Hit the Most Splendid Housing Bubbles in America
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God forbid housing prices continue on a downward trend and plebs gain the ability to purchase them. Sarcasm of course.
Indeed. We must all remember that we used to buy a ‘house’ and use it as a ‘home’, we now buy ‘properties’ and they are a ‘financial asset’, to be speculated with like any other. And used it seems as a cash dispenser and a pension pot (given that employers will no longer make adequate pension or pay provision for a fair chunk of their workers)
‘Home’? Oh, how sentimental of you……
Well, people who try to treat property as an AM deserve everything they get – above all those who use it finance property for their children at prices detached from fundamentals.
If you own one of these towers you have two choices, drop the price to where the units sell and take a small profit or a small loss or chase the market down and go bankrupt.
I’ve seen this show before, almost all will chase the market down whining and trying to shift the blame the whole way.
There will be some nice buys in three years…
The big problem is these properties were never meant for ordinary people, or even the affluent. Leaving price tag aside these are extremely expensive properties to live with. Just think about the Council Tax, which is levied according to valuation and, ironically enough, gets a 10-50% rebate (according to locale) if the house is not occupied “on a permanent basis”. Then there are what Americans would call “HOA fees”. Again, extremely high.
To get these properties to move a major redesign would be needed at all levels, but it makes zero economic sense (labor in the UK is expensive, as are permits; but in London everything is bloody expensive): the projects which have gone too far to be stopped will drag the high end market down for years to come while developers hold on to impossibly high valuations to avoid showing how desperate they truly are. The trick they have learned from Italians and Spaniards which can be kept up only as long as banks and the government are compliant. When either backs off, the fun will start.
The big problem of London developers is they grossly overestimated the market for high end properties, perhaps blinded by how their city had become a haven for Russian oligarchs and Asian godfathers alike. But those two categories are in short supply these days: Russians are too much exposed to the whims of their own government, and that government is now far less compliant than it was a decade ago while Asian godfathers, especially Indonesian, are back at buying properties in their favorite safe haven, Singapore, meaning they expect trouble at home soon.
But demand is anemic and the developer behind the project, Almacantar, has all but given up trying to sell the flats after receiving too many “detached from reality”
Well someone is detached from reality. Reality also known as the market.
I wonder what the developer thinks will ride to the rescue? There isn’t going to be a Brexit deal that will clear the air as much as a second referendum and a no- Brexit. Which is unlikely.
Does the developer think interest rates are going down? Sure the Russians and ME buyers were often cash buyers but when the ruble fell by 50 % so did a lot of Russian assets. And the squeeze was already on Saudi before its latest screw- up. Failed flotation of Saudi Aramco etc.
These guys must have deep pockets to be able to sit on upwards of half a billion of inventory.
My guess is that nobody will want to take the losses until the banks call their loans. Now that the big investors realize those high-end properties aren’t the safe haven they once were, we’ll see the standard result of foreign capital chasing profits: lots of bankruptcies when that money leaves for sunnier shores.
Sort of like a shallow lake where folks think the water will always be there. When there’s a drought, the receding water leaves previously hidden muck and abandoned trash visible for all to see.
Adam Smith advised taxing properties to extract all location-based premium. If Almacantar started getting annual tax bills of 20% of the property’s worth, they would be reducing prices pretty quickly.
Fortunately for Almacantar, there aren’t any capitalists left. Only crony-capitalists who will do “whatever it takes” to push down the middle class.
I think Adam Smith advised, or at least agreed, Land Value Tax (LVT) was a sensible tax. As, in fact, it’s more like a fee which claws back the unearned value of land, the extra value it has due to its location. Taxing property (buildings) is not sensible, it discourages people from improving their property.
Also, one of the nice things about LVT is it’s incredibly difficult to avoid, mainly because no one’s worked out how to offshore it. It’s argued LVT would put an end to land speculation and high house prices. Trouble is, those with the most land have the most influence on those who make the rules.
One way to look at it is that there is an LVT insofar as the more desirable, close-to-demand-area properties carry a premium price; the difference is that the premium is paid to the owner of the property rather than the government who just waste the money instead of employing the capital gains efficiently.
Annual taxes of say, 20% would be destructive, and if the properties are not selling ultimately the price must fall to clear the market anyway. Ruining developers is not the way to create wealth, just because the term ‘developer’ has attained an odious taint, like the oil companies.
But we would not be driving or heating our homes without energy companies, and we would not have homes without developers, however envious the media and academics are of the concept of profit for goods provided.
Bloody hell
while it might seem clever to own a home that makes more money than the owner’s salary–it is also the height of stupidity–and financial manipulation.
imagine if real estate prices fell by a half. your monthly house payments cut in half. would that work for you or against you? the only ones who would be devastated would be the banks holding those obscenely priced mortgages.
the rigged real estate bubble is there for the benefit of the banks and wealthy speculators–not joe shmuck whose only way to get ahead is an appreciating mortgage. canada take note!
wake up. the best thing that could happen to this housing bubble is a debt crisis where mortgages are cut in half so that not everybody is thrown out onto the street. being homeless is so unseemly.
the US dodged this scenario by selling all those foreclosed homes not to prospective home owners at a loss but to wealthy investment funds, who purchased thousands of homes from the banks and then began renting those same homes to those who could no longer afford to buy–having been thrown out by the banks.. wall street wins again at both ends.
a debt crisis is coming and when the dust settles, my bet is real estate will be selling for a fraction of what it’s selling for today. and that my friends will translate into a huge increase in disposable income. less money for the greedy banks, more money for everything else.
“the US dodged this scenario by selling all those foreclosed homes not to prospective home owners at a loss”….I don’t think this is an accurate evaluation because I’ve read 9 million people lost their homes during that crisis and were forced into homeless and/or worse conditions. That’s not really what I’d call “dodging” anything unless you’re the fraudster banksters our govt protected against victims of their fraud loans. Writing down the principle is what should have done because it would have allowed the economy to recover at more historically normal way of much higher growth rates that what we actually got. And the party in power responsible for this policy of siding with the fraud loaners by blocking loan write downs – the Democrats – went on to lose more political offices in those 8 years than any party has ever lost in all US history, under that President. So it was at least as bad politics as it was economis.
Gordon, nope.
Will never ever ever happen. Prices may go down a smidgen, more likely they will stay flat for a few years.
The exception will be anyone who gets in over their head and has to foreclose. Good luck getting those houses as speculators and investors with deep pockets will be there with cash to snatch them up….. just like last time.
“Prices may go down a smidgen, more likely they will stay flat for a few years”
damn, I wish I had a nickle every time I heard that about California real estate…..it has never ever done that.
Between theory and practice the law on bankruptcy and banks has some latitude. In 2008 the Fed chose to prop up the banks, the legal remedy was to let them fail and allow the strong banks to buy the mortgage paper and rewrite the terms with the homeowner. That never happened. They were able to keep interest rates low. This time around interest rates are already low, lower than neutral. There is also some notion of how tolerant regulators are of “shadow” banking. Clearly it would be a boon for charter banks to buy up shadow bank assets at a discount, and allow rates to rise when they restate the old mortgage paper. Just a matter of where policy lands, and whose ox gets gored and how the legal unraveling of MBS proceeds, since that issue was largely ignored in the last crisis.
My heart is broken to read that those at the thin upper crust of global wealth and income scale might now be living on the margin….How do I open a Go Fund Me account to help them in their time of need…
It’s the poor saps who, driven by fear and an exploitative rental market, have scraped together £300K+ to buy a crappy one-bedder in a part of London no-one would ever live if they had a choice who will feel the most pain, unfortunately. The wealthy will find a way to write it off as a tax deduction. In the case of many foreign speculators, it was/is a money laundering exercise so they really aren’t concerned as long as that task has been completed. 50% of something you stole ain’t that bad.
Ha, Ha ! Who coulda knowed —
“I am London Developer .. Look upon my mighty condos .. and despair”
with apologies to the late Shelly …
Same script in all bubble markets. Somehow these big money experienced developers decided to build more product than ever in history right at the end of the cycle.
Well, they aren’t that stupid, or uninformed. This is all by design to ensure a crash that will not recover, while providing jobs until the end.
true, dat.
Spain has whole cities that have been built which no one will ever occupy. Its just an originate to fail, while creating employment, business model.
When the wealthy speculators lose interest and try to liquidate into a market with no local buyers able to afford – what happens next?:
a) minimum wage immigrants needing to be housed prop up the market
b) pent-up demand of the under-30s saves the day by riding to the rescue as soon as prices drop by around 5%, as they’re gagging to snap up 50 year old single bedroom ex-social housing apartments for £285K instead of £300K (resident drug-dealing gang servce – FoC)
c) the asset bubble bursts just like every other asset bubble has for hundreds of years. And the decline goes on for years.
Answers on a postcard please. Old school.
As someone old enough to remember how Centre Point (offices) got to be built so tall in the first place – a quirk of planning law – it would make more sense for the developers of Centre Point Residences to lower the selling prices to market level. Mind you, they probably will, just not make it publicly-known. Not the first time early adopters have over-paid.
The main reason property prices have risen is low interest rates. Close to zero interest rates is supposed to make it affordable for anyone to buy, not that prices should shoot up until they become unaffordable.
Heartbreak in Australia:
https://www.realestate.com.au/news/were-heartbroken-home-in-same-family-for-93-years-passes-in/
The agents managed to get the bidder up to $1.67 million, but it was still a way off the $1.75 million reserve.
“Yes we are heartbroken,” Mr Kerr said. “We expected to get something more reasonable than this.”
“This is garbage.”
They estimated her grandparents had bought it for about 5000 pounds.
According to the Reserve Bank of Australia inflation calculator, that’s about $400k in today’s money.
Just heartbreaking (/s)
Actually, in looking at the historical data, the median house price in Sydney at that time was about 600 pounds, or $48k in 2018 dollars.
It does seem the idiotic desperation to “Get On The Property Ladder” is evidence of collective insanity.
Help to buy schemes, low interest rates will all come to an end and the rungs will break.
It will be an almighty mess.
Centrepoint is an ugly brutalist tower in the heart of London but not in an area I’d choose (intersection of Oxford St and Tottenham Court Rd) — full of tourists and scruffy shops. IIRC it was used to house homeless people for a while. If I were in the market for a luxury London flat it would be at the bottom of my list.
I regularly spend time in London and am bemused by the plethora of luxury flat developments even in South London (generally working class and very scruffy). As noted above at some point they’ll be available on the cheap. Pity the Malaysian and Hong Kong investors who thought they were in on a great investment!
->If I were in the market for a luxury London flat it would be at the bottom of my list.
If I were in the market for a luxury property it wouldn’t be in London. Who would have thought I’d become such a trendsetter.
->But new high-end towers will continue to flood the market.
The 1% won’t be paying for them. They wouldn’t be living in them anyway because London is overcrowded and increasingly prone to flooding, never mind the high cost of tax evasion. Instead, the 99% will pay for them, even though they can’t afford them. That’s the genius part: no moving expenses will be incurred by anybody.
It only makes perfect sense to building housing – during a housing shortage, that nobody will live in – if you have money that has to be invested somewhere and you know you’ll get a fat return regardless of occupancy rates.
Take this concept to its logical conclusion and you could end up with ghost cities in China and make billions.
Coming to a city near you!!
I would like to know how much of THEIR OWN money the developers have in these projects. I suspect that much of their wealth is insulated from any project losses.
Trees don’t grow to the sky, but they can grow very high.
The central banks of the world are responsible for all of the current asset bubbles
If others join the Fed and reduce their balance sheets , the jig is up throughout the world and history will look at the current bubbles as just another chapter
less money to spend on over-priced high-end London real estate or are splashing it elsewhere, including in other parts of the UK.
Where else would a Russian, Asian or Arab multimillionaire want to live in the UK? Are grand country estates coming back in style? If they’re just buying for investment I guess it doesn’t matter, but there’s not much prestige or socializing with other multimillionaires of similar ilk in Bristol or Glasgow.
LONDON is the weekender.
Real money has a personal polo field on an estate in Posh-tershire.
Soon SPV ownership of UK property will have to be KYC/ AMLd back to the final beneficiaries. There is also the confiscation of property where you cant prove it was bought with legal earnings… The Chinese bid has also dried up.
All this points towards a lot of dirty or grey money moving on
These properties will clear at £400-450/ sq ft as pensions buy them for PRS rental.
Another trick developers are playing in London to avoid dropping prices is to pay the stamp duty on behalf of the buyer, which they then proceed to write off as a marketing cost.
Talking about market manipulation.
Possibly the market should feel a squeeze also from the bottom price. A small but meaningful share of the lower-end London apartments are bought by young people who factored renting out a room into the financials. After years of experiencing the worst possible humiliation in Britain – not being on the “housing ladder” – they finally hurled themselves onto its lowest rung accepting a permanent sublet as the required crutch.
To pay their monthly mortgage, they continuously need a paying tenant. The room letting market in London is fairly liquid – during their first years in the capital, it’s not uncommon for younger people to move every couple of months. Anecdotal evidence from the response on restaurant job offers (2/3s down on prior year averages) suggests that immigration relevant for those rentals has slowed and almost all hospitality service jobs in London are done by foreigners.
Those house owners need to follow the rents down and I wonder if this may cause forced selling at noticeable scale.
Minsky’s Late Stage Ponzi Capitalism is rife with speculative investors due to Hot Money Laundering out of mainland China. With China’s Central Bank curtailing how much money can be taken out of the country we have the requisite downfall of High End RE all over the world from Vancouver to London UK.
Speculative investment on High End RE has been crashing since 08. Manhattan has been ebbing lower for at least five years now but the metrics issued are essentially ‘Fake’. Fake Metrics & Fake News is part & parcel of Late Stage Ponzi Capitalism.
The End Game is Zero Sum and this is NOT a so-called ‘fourth turning’.
MOU
yeah the market’s off 15% since 2014…
you can factor in another 25% in FX losses as well…
If your property market is denominated in a currency getting ready to be the next Mexican Peso… well, it looks a lot more like a crash.
House prices have fallen:
The property market is owned & run by investors.
“Thank God For Negative Gearing”
Q:
How can the value of property fall ??
It is a trick.
Some property falls in price, we will call this the “sacrifice” – the bait.
“Thank God For Negative Gearing”
You see we borrowed more last year a “reshuffle” of ownership of the said real estate.
We owe more on a higher rate of interest.
How does negative gearing cover the loss ??
It cannot.
We must be tax deducting it somehow or we are in desperate trouble.
I want to purchase a house in Frankston.
So … every once a week or more I look.
They have pulled the big homes with all the nicknacks off the market for now.
They are now selling – 3 bedrooms – 1 bath – 1 toilet cottages for $500.000 plus – forget about the garage – there is not even a carport – just some poxy landscaping to give it ‘that’ look.
It’s all smoke & mirrors down here – & the public purse is hemorrhaging to keep the game going.
I’d like to tell a story:
Once upon a time …
In the land of Australia there is a State called Victoria.
Heidelberg West, then & now unserved by a railway, was sparsely settled until the 1950’s.
Heidelberg West is a residential area 11 km north-east of central Melbourne, north of Banksia St & on the east side of Darebin Creek. It is relatively remote from the railway line & was developed for residential living by the Housing Commission in the 1950’s.
As the story goes …
European migrants had arrived in Australia & there was no adequate housing, whole families lived in one room & shared the amenities.
Sooooo –
The then Victorian government decided to develop a housing estate via the Housing Commission & offer many of the houses up for sale.
The thinking was thus – the common man / the worker, is not capable of paying off a mortgage, we will offer the houses up for sale & they will default on their loans & we will repossess the property & it will fall into our portfolio free & clear.
1. crown land opened up for development.
2. development funded via Housing Commission from Public Purse.
3. real estate sold to the hopeless of the community.
4. who default on their housing loans.
5. realestate now belongs to (??) … all free & clear & all will know that we the government of Victoria tried our best.
Imagine their HORROR when approx: 97% of the mortgages were paid off.
It was a scam to defraud the state of Victoria by the then power brokers of all things.