UK Housing Bubble Swoons as Brexit-Day Nears. London Hit Hardest

Rampant unaffordability and a slew of other reasons.

By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.

In the fourth quarter of 2018, prices in prime regional housing markets in England and Wales fell by 0.9%, according to global real estate agency Knight Frank. For the whole year, priced dropped by 0.6%, compared to 2017. The rate of annual price growth in the prime country market has averaged less than 1% since mid-2016, compared to almost 3.5% between 2014 and 2016, with peaks as high as 5% in 2014. Something isn’t working anymore:

By a different measure, across the UK as a whole, house price inflation slipped to just 0.9% in the year to November, according to a survey by LSL Property Services/Acadata that is based on every residential property transaction in England and Wales. It’s the lowest annual rate since 2012 and well below the rate of consumer price inflation. It’s also below the rate of wage inflation, which rose to 3.1% in October, its highest level in almost a decade.

There are a plethora of reasons for the current stagnation, chief among them:

  • Housing unaffordability, particularly in London and other prime markets
  • Dampened overseas demand
  • A slew of of new taxes targeting buy-to-let landlords and overseas speculators.
  • And of course, there’s Brexit.

Knight Frank lays much of the blame for stagnating or declining prices on buyer hesitancy, as acute uncertainty over Brexit and the political future of the UK deters buyers from taking the plunge. “Many, according to our sales negotiators, are choosing to sit tight and wait for clarity as the March 2019 deadline for leaving the EU nears,” the agency said.

March 29 is the deadline for the UK to reach an exit agreement with the EU.

But clarity could be a long time coming. Theresa May’s proposed Brexit deal is abhorred by Brexiters and remainers in equal measure. Offering the worst of both worlds — continued membership of the customs union and continued observance of the rules and regulations passed in Brussels, without any influence over their passage — the deal is likely to be rejected by parliament in January. That will leave two possible outcomes: a crash-out exit at the end of March, or no exit at all.

The prospect of a crash-out exit is one that many prospective and current homeowners have gradually grown to dread, especially since Bank of England governor Mark Carney’s semi-apocalyptic warning, in September, that a disorderly Brexit could wipe 35% off house prices during the immediate three-year aftermath. If the UK left the EU without a deal, he said, the Bank of England would have little choice but to hike interest rates to prevent Sterling from crashing. That, in turn, could decimate demand for housing while fueling an increase in defaults and foreclosures.

The 35% price collapse forecast by Carney sounds extreme. It would be almost double the size of any other housing crash suffered by the UK in the last 50 years, including those of the late eighties and 2008-09, when prices plunged by 20% and 19% respectively. For that alone, the Bank of England has been accused of once again serving as the shrillest of shills for Project Fear, a role it has filled with aplomb since long before the Brexit vote.

Be that as it may, even where sales are being made, they are generally taking longer to complete, particularly in the south and east of England. So far in 2018, the amount of time needed to sell a house valued above £500,000 in the South East has grown by 23% compared with 2016, Knight Frank analysis shows. In the east of England the increase is 28%. In London, the market arguably worst hit by pre-Brexit angst, it’s over 30%.

For only the second time in 23 years, house prices in London are on track to end the year with declines, according to Home Track UK’s 20-city index. It’s much worse in the most expensive parts of the city, where prices have already dropped 15% since 2014, according to James Hyman, head of the residential agency division at Cluttons. In prime central London land values are down almost 20% since hitting a peak in the third quarter of 2015. Buying and selling activity is also down.

But further price declines are welcome by potential buyers — people with decent incomes who cannot afford to buy even a modest home in London. Even as prices of land and property in the capital drop, they’re still beyond the reach of the vast majority of Londoners. 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.

As London-based estate agency Hamptons International reported this week, the affordability crisis in the capital is spurring Londoners to relocate to other parts of the country at the highest rate since 2007.

As for high net-worth investors — just about the only people left who can afford to buy residential property in London these days — they 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 such as Scotland or the Midlands where median prices have respectively risen by 5.5% and 3.6% over the past year. If it weren’t for the buoyant activity in these non-prime markets, 2018 would have been an even rougher year for the UK’s property market. By Don Quijones.

Companies feel the pain as euro junk-bond yields more than doubled. Read…  ECB Ends Corporate Bond Buying, and Look What Happens

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  34 comments for “UK Housing Bubble Swoons as Brexit-Day Nears. London Hit Hardest

  1. Howard Fritz
    Dec 29, 2018 at 8:29 pm

    I personally do not believe Brexit will bring about cataclysmic change in the UK. In part evidenced by the still sky-high valuation of these properties. Some would argue that a measly 0.9% drop in any other context could be rationalized by the cyclical nature of the market. However, the triggering of Article 50 has led us to put their entire society under the microscope. Nonetheless more remains to be seen.

    • RepubAnon
      Dec 30, 2018 at 12:13 am

      Housing prices tend not to drop much during a downturn. Instead, people take their properties off the market if they can. However, one could see real estate prices plummet if London is no longer home to the big banks and financial institutions. If they move out of The City, so will many of the folks who can afford to buy those high-end homes. That would trigger a downward spiral when people are forced to take s big loss on those properties.

    • raxadian
      Dec 30, 2018 at 6:17 pm

      Is about money dear boy.

      Brexit means less money at least in the short and middle term. I can pretend to be optimistic and say that maybe things will improve long term.

      Bur for now and at least for a few years, the UK is in trouble.

  2. Ronnie
    Dec 29, 2018 at 9:10 pm

    As a bullion investor any financial suffering by London brings tears of joy to my old eyes. Olde English saying,” cheaty come fair.”

    • Atu
      Dec 29, 2018 at 10:55 pm

      That’s an adult dating site right ? I guess London hasn’t changed all that much since the day then.

  3. Atu
    Dec 29, 2018 at 10:28 pm

    The next few month are going to be “fun”.

    The UK hasn’t to reach a deal with EU mind, the dealing is done and EU is not likely to budge any more than the current government is either. Do you think that in a couple of months that UK will present some new draft in reaction to any home defeat of the current paper, pass it by EU plethora, then vote it, etc. ? Not going to happen from where I’m looking. So it is accept current draft, delay, second referendum, or a no-dealer. Delay or second referendum are too low to contemplate I think, unless a second referendum were only on exit mode “accept the draft or no-deal exit”, but even then time is very short for holding another referendum, and there would be much discontent.

    You really have to wonder what they all think they are doing. I say they as a disenfranchised British national, a “citizen of nowhere” as the PM would have it, all the better as someone who has Brexited and as good as EU-exited already and was never given a choice in rejecting one or accepting the other either.

    Well I hope housing goes up by incredible amounts for all the rich people buying, and that it sinks to a pittance for those who cannot currently afford it, will keep everyone happy that way ( except if by government hand, which inevitably transforms what it touches to manure) .

    Have you noticed many news articles state the value of someone’s house nowadays, as in ” who lives in a £300 000 house in… “. Such kidders, and I look forward to ” who lives in a house that used to be worth £300 000…” . That’ll make people think.

    • BobT
      Dec 29, 2018 at 11:00 pm

      I have been a Brit “citizen of nowhere” for the best part of 4 decades, based in various Asian countries, never had a single regret. I can highly recommend being a mobile expat. If backed by a good lawyer and accountant massive (legal) advantages are there for the taking.

      • MD
        Dec 30, 2018 at 4:56 am

        Well I suppose there are massive advantages if one’s life revolves around tax avoidance.

        Otherwise it sounds like a rather sad, lonely, self-indulgent and pointless existence TBH.

        • Nicko2
          Dec 30, 2018 at 6:58 am

          Another ‘citizen of the world’ here. Allegiance to a single nation state is increasingly obsolete. We’re in the post-global age. All you need, a passport from a developed economy, a few offshore banks accounts scattered around, properties in a few others, a smartphone with roaming and a decent laptop. Nothing lonely about it, live like a king.

        • Briny
          Dec 30, 2018 at 12:46 pm

          As a roaming field engineer, I never knew where I was going to be next nor what type of problem would need sorting out. Keep a bag packed at work; I may not be coming home that day. As I come from a long line of engineers on both sides of the family tree, all of them serving in the navy, that does make sense. New places, new people and new customs. Fun. I don’t consider that pointless at all.

    • fajensen
      Dec 30, 2018 at 9:01 am

      Yup. Fun Indeed. We have not only one but two games of chicken going on:

      Theresa May firmly believes that the EU will not let the UK leave without a deal so if only she can run out the clock, the EU will blink and write up a better deal for the UK.

      Donald Trump absolutely believes that China will make significant concessions to the US if only he keeps threatening Xi with trade restrictions and tariffs.

      Games of Chicken are random: one party wins, one party loses or both wipe out. There is no investment edge to be had (except perhaps in the Brexit case where the EU has been very clear and consistent all the way but nobody know what the UK will end up doing).

      So, playing the markets at this time is a bit like picking up dollar bills on the highway. One may get a few only to get run over by a speeding 18-wheeler or a crummy van. Long Volatility – bet on more than the normal accidents – is the game, IMO.

  4. Stuart Brown
    Dec 29, 2018 at 11:04 pm

    From UK. Remember in late eighties seeing bank manager and him telling me that bank felt prices were going to fall so he was slicing 20% off his banks valuation and I could have 75% of lower figure at, IIRC, 7% interest. Bank was correct re direction of prices and look back thinking sensible underwriting. Can’t imagine this happening now.

    35% reduction in prices through Brexit. Believe this will happen through recession in any case. Bring it on. Current situation with schemes like help to buy is propping up market and ripping off normal people in favour of developers.

    • HMG
      Dec 30, 2018 at 12:05 am

      S Brown

      Yes, all caution has gone out the window. Ever since your namesake chose to turn Building Societies into Banks with shareholders, dividends, directors share bonus schemes and Bank-Building Society mergers, incentivised mortgage schemes with inflated loans to value have become the norm.

      On the back of falling interest rates this has to date resulted in very little pain for the mortgagee, even during the 2008-2009 period.

      Let’s now see what happens next.

  5. Javert Chip
    Dec 30, 2018 at 12:45 am

    Food for thought regarding UK, EU & BREXIT (caveat emptor: PPP numbers are used; for some comparisons, nominal figures would be materially different):

    o in 2017 EU (INCLUDING UK) represented 16.5% of global economy, decreasing about 100 basis points every 5 years (EU is growing slower than global average)

    o In 2017 UK represented 15.3% of EU’s 16.5% of global economy

    o Without UK, EU would immediately drop to 14.0% of global economy, and continue to decrease

    I have no analytical idea what will happen to post-BREXIT UK. However, I assume the 1-2 year transition will be at least moderately rough. However, after transitioning, truly free and democratic societies tend to outperform more heavily-regulated/managed (worst case: socialist) societies

    • Javert Chip
      Dec 30, 2018 at 12:48 am

      clarification: 15.3% of 16.5% = 0.153 * 0.165 = 0.25, 0r 2.5%

    • Realist
      Dec 30, 2018 at 6:17 am

      One thing that will be intereseting to see when/if there will be an actual Brexit:

      British industry is a big parts supplier to other EU countries and usually trade agreements stipulate that a certain percentage of a product must be sourced from the EU to label the product as EU made.

      This might force a lot of manufacturers in the EU to look for EU based suppliers to replace their current British ones and this might have indeed interesting consequences, one sure effect in this case will be lay offs and this will affect housing markets and especially rental markets in British industrial areas.

      • MC01
        Dec 30, 2018 at 8:19 am

        The Swiss manufacturing sector (one of the world’s largest as percentage of the GDP) is closely intertwined to the German one. Very closely interwined I dare say.
        Business continues as usual even after the well-funded but poorly orchestrated campaign to join the EU died a long agonizing death. The fearmongering by the “friends in the media” of the large manufacturing dynasties such as the Bührle family, the German- and French-controlled AG and the secretive SA suspected of being controlled by “foreign investors” turned out to be just that: baseless fearmongering.

        There are many reasons why manufacturing is already taking a hit throughout Europe (just count the number of lorries on the road and compare it to June) but Brexit is not among them.

  6. Covey
    Dec 30, 2018 at 2:55 am

    In the UK property market there is London, and then the rest of the UK!!

    I own a 2 bed, 2 bath flat in Peckham, S London, which, when I bought it in 2002 for £122k, was located in the Drive By Shooting Capital of the UK.

    Today the flat is worth £500k and others in the block sell in 2-3 days, and the rental is £24k per annum. Lunacy!! The flat was an ideal “starter” flat for a couple living and working in Central London and rents used to be around £10k when I bought. Because they sell so fast, you need to be a cash buyer and the current rents mean that you actually now have two couples sharing to try and bring the costs down to somewhere near reasonable.

    If London prices drop by 25% it will not bother me in the short term, but it might release some spending power if rents did not take up such a high percentage of a couples income.

    • Steve clayton
      Dec 30, 2018 at 4:33 am

      Agreed Covey ref London house prices they’re on another level compared to the rest of the UK. As for house prices going down, good news. Even outside London houses are over priced.

    • Cynic
      Dec 30, 2018 at 8:59 am

      Still, it is nice to see the olive trees in pots outside those newly-painted, South London houses these days. :)

    • ML
      Jan 1, 2019 at 3:58 am

      Peckham I read is now one of London’s desirable hot spots.

  7. medialAxis
    Dec 30, 2018 at 7:16 am

    One concern being voiced of late, here in the UK, is the Equity Release Trap. Equity release providers are properly accounting for the guarantees they offer borrowers, it’s thought the industry is making over-optimistic bets on the housing market. Although the equity release industry has made sure that the customer is shielded from financial risk, it leaves the lenders exposed. There’s a program on the radio about it today[1]. Not that I’ve gone for equity release myself, nor am I invested in it. Just a heads up to investors (and customers, as it sounds like it might be a good deal!)

    [1] https://www.bbc.co.uk/programmes/b0bd8h78

  8. Cynic
    Dec 30, 2018 at 8:55 am

    One advantage to living in one’s own country is that one is not exposed to being murdered on the strength of skin colour, accent, presumed or actual religion, etc.

    Those who are smug about their – undoubtedly convenient and lucrative – expat lives now should bear in mind that, once tensions rise high enough and for long enough, the robbing and killing of outsiders – however defined – always starts.

    Innumerable historic and contemporary instances of this show that this is a basic fact of life.

    Of course, one of the ironies of modern life in the migrant world created by the internationalist Left and Neo-liberals is that one can now be an ‘outsider’ in one’s native town, due to total population replacement…….

    One of the strengths of national feeling is that a stranger will help you, even make sacrifices, ‘because you are one of us’: in a dangerous and psychotic world, this is worth valuing.

    In assessing where to live at the moment, I bear in mind ‘Would a native take me to be one of them at first glance?’ I would not dream of living anywhere that I stood out from the crowd, and least of all as richer than others (expats should think of that).

    National loyalties, so patronisingly dismissed by some, are ‘so yesterday’, until they aren’t…….

    • Maximus Minimus
      Dec 30, 2018 at 2:53 pm

      Couldn’t have said it better myself. Given that you use my previous, abandoned screen name, it’s just as well. :)

    • IdahoPotato
      Dec 30, 2018 at 7:14 pm

      “I would not dream of living anywhere that I stood out from the crowd, and least of all as richer than others (expats should think of that).”

      When Europeans, Aussies and Americans live in other countries, they call themselves “expats”. Foreigners who live in Europe, the U.S. or Australia are called “immigrants” or “aliens”.

      I met a German recently in Bangalore who told me about “expat” life and asked me about the “immigrant” issue in the U.S.

      Very interesting.

      • Kaz Augustin
        Dec 31, 2018 at 5:15 am

        IdahoPotato

        I hear ya. I was still a “migrant” in Australia, even though I was a citizen for decades and the paleskins are still “expats” in Asia even when they’re not. From time to time, it still bites.

  9. I am old.
    Dec 30, 2018 at 9:20 am

    Forget Brexit.

    Keep your eyes on the global financial collapse that is coming. I agree with Mitch Feierstein, property in the UK will crash by upwards of 90%.

    1960, Three-bedroom semi-detached house in Harrow, London £3,400.
    1975, Three-bedroom semi-detached house in Harrow, London £80,000.
    2018, Three-bedroom semi-detached house in Harrow, London £555,000.

    All in the same street.

    The insanity of human kind knows no bounds, it has always been so and always will be.

    • walter map
      Dec 30, 2018 at 7:00 pm

      “The insanity of human kind knows no bounds, it has always been so and always will be.”

      That’s not exactly true. Because of what it is, self-destruction is necessarily time-constrained. Things that can’t go on forever end up, well, ending.

    • ML
      Jan 1, 2019 at 4:04 am

      I used to live in Harrow. On the Hill, my first house i paid £9800 in 1973. Ferch £500,000 now. But I didnt stay. Relocated to way outide London wher house price growth has been slower and less giddy.

    • Kia
      Jan 2, 2019 at 8:10 am

      I am old –

      Mitch Feieirstein predicted London prices would fall over 6 years ago and in that time they have doubled and in some cases tripled in price!

      A stopped clocked is always right once. I am sure London house prices will fall by 90% some time in the next millenia!

      • I am old
        Jan 3, 2019 at 6:22 am

        Kia

        As Mitch Feierstein has said many times, he doesn’t know when the global financial collapse will occur, for what it is worth I knew in 1981 that one day this would happen. I was not alone, only one other said what I thought, he was a former deputy director for the CBI here in the UK, he was being interviewed (about 1981), he said this off Thatcher…”What is happen is crazy, you can’t run an entire economy on exporting your manufacturing base abroad and run your economy on being a services base economy, serving each other cups of coffee all day, at some point your economy will crash”.

        We would all be better served if we now think about why those who rule us all done what they did, they knew what was going to eventually happen, there will be a reason and I fear we will eventually know the answer!.

  10. walter map
    Dec 30, 2018 at 3:17 pm

    Recent data show that a third of Britons live in poverty and regularly risk food and shelter insecurity. At the same time billions in taxpayer-paid subsidies for the always-obsolete aristocratic class remain as popular as ever.

    Forty-four trillion stolen from India and commoners still can’t pay the bills. The French can only shake their heads.

  11. jon laughing
    Dec 31, 2018 at 11:57 am

    The old duck “brexit.” Something that everything can be blamed on, again and again – until when? 2020? 2025? But please just explain why Brexit matters to a local worker in (say) Birmingham who goes to work and raises his family and needs to buy a bigger or smaller house. Why does Brexit alone have anything to do with his personal housing needs and decisions. He ain’t moving to Brussels or Paris or Frankfurt. His job is in Birmingham, his family is in Birmingham and his future is in Birmimgham. He will move when he needs to and not based on any Brexit news, strategy or failure.

    • fajensen
      Jan 2, 2019 at 10:15 am

      Brexit will matter to the local worker when the German, French or Swiss owners of the Birmingham “British Car(tm)” assembly lines tidy up their sprawling logistics and move his job off to Latvia.

      This happens because it will be easier to apply those, cherished by the swivel-eyed tribals, “WTO rules” on one assembly than it is to do it on thousands of discrete parts, even assuming one has good PLM-software support (it is well known that all PLM software is more or less garbage, and given that the IT-consultants now have less than 3 months to hack into existence whatever it is that Brexit means – it will be a shit-show!).

Comments are closed.