A coming crash? Or a minor blip?

Luxury London new-builds in trouble

From John Stepek
Editor, MoneyWeek

Surveyors across the UK are predicting an “outright fall” in house prices for the first time since 2012, according to the latest Royal Institution of Chartered Surveyors survey.

Prices are already falling in London. The rest of Britain is set to follow.
Sounds dramatic. And it sounds promising for anyone hoping to see some semblance of normality return to the market.

Unfortunately, it also sounds rather overdone. I wouldn’t get your hopes up.

I’ll admit that it’s not like me to downplay the case for falling house prices – which I believe would be a good thing – but I’d need to see more evidence of a wider downturn before being convinced that this is the start of something bigger.

For a start, most of the weakness is concentrated in London. That makes sense, but there are quite specific reasons for this.

Luxury London new-builds in particular seem to be in trouble. They have been for a while. And no wonder. On the supply side, housebuilders seem reticent about building good quality homes for people who live and work in Britain – perhaps because there’s not enough competitive pressure on them to do so.

But at the same time, developers have been falling over themselves to build these crumby tower blocks for the global oligarchic classes. So there are a lot of them out there. More flats than oligarchs? It wouldn’t surprise me.

On the demand side, meanwhile, the top end of the market (above £1m or so) has been hit by a series of hiccups. Stamp duty has risen since December 2014, and now there’s another 3% on top for second home buyers. And the buyers themselves have seen their wealth hit by turmoil in the commodities market.

Equally, the London market is bound to be affected at the margin by foreign buyers holding off on making decisions ahead of the EU referendum (why buy now if the hype around Brexit has persuaded you that you might see a big drop in sterling that’ll make your purchase a lot cheaper in a month’s time?)

However, London – and luxury London in particular – is a very specific part of the market, being sold to a specific group of buyers. It really doesn’t matter how big a discount the developers end up offering to shift this stuff – they’re never going to fall far enough to be affordable for ordinary mortals, and as a result, they probably won’t have a knock-on effect on the wider market.

A storm in a teacup

What about the rest of the UK? When you look at the broader market, there are some good reasons for surveyors to be a bit fretful right now. But it’s largely based on temporary factors.

The rise in stamp duty on second homes pulled forward a load of demand from buy-to-let and holiday home buyers. The market roared ahead earlier this year as a result. So the period following that cut-off date was bound to show a slump in demand. Property industry people being the way they are, even a blatantly predictable drop in demand is enough to have them clamouring for help.

But at a fundamental level, nothing has changed to make a widespread crash seem likely. In fact, signs are that things are getting worse. History demonstrates that it’s the cost and availability of mortgage finance that really drives house prices in the UK. And right now, mortgage financing is becoming cheaper and more widely available.

Interest rates remain at rock-bottom levels. Competition in the mortgage market is growing again. Those aren’t the sorts of conditions that typically result in a house-price crash in the UK.

Irritating as it is to admit it, this doesn’t look like being a tipping point. It’ll take something a lot more drastic to bring some sense to our overvalued, dysfunctional property market.

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