London House Prices "Battered From All Sides"

This week we discussed Algebris Investments’ ranking of the world’s largest financial bubbles. London property ranked second on the list, behind Australian property (see here). There is growing evidence the former is bursting. In its October 2017 survey, the Royal Institute of Chartered Surveyors (RICS) reported the largest proportion of respondents seeing a drop in London house prices versus the previous month since 2009. The net balance at nearly two thirds (-63%) in the capital contrasted sharply with a national average which was marginally in positive territory (+1%). The RICS data corroborated yesterday’s Bank of England’s regional agents’ report which highlighted “signs of excess supply in London and the South, but some excess demand in most other parts of the United Kingdom”.

According to Bloomberg.

London’s housing market is being battered from all sides. A survey by the Royal Institution of Chartered Surveyors showed a price gauge at its lowest level for seven years, and far below the national average.

 

Real-estate agents are more pessimistic about the market in the capital than any other region, with contributors flagging a potent mix of concerns, including Brexit uncertainty, the Bank of England’s interest-rate hike and the government’s budget later this month.

Speaking to the FT, RICS’ chief economist gave his take on what’s causing the weakness, surprisingly only referring to Brexit indirectly.

Simon Rubinsohn, RICS chief economist, said various factors - including higher cost of moving, a lack of fresh listings and political uncertainty - seemed to be taking their toll on market activity, with first-time buyers focused on Help to Buy properties rather than the existing housing stock.

 

“With both buyer enquiries slipping and sales expectations also subdued, the sense is that homeowners are staying put,” he said. “A stagnant second-hand market is bad news for the wider economy.”

Besides London, the RICS survey showed that house prices are declining in three other regions, two of them being “commuter-able” to London – the South East and East Anglia – as well as the North East.

As far as the outlook is concerned, the RICS survey painted a negative picture with the majority of respondents expecting further price falls in London. Furthermore, the price weakness is expected to spread beyond London and the three other regions to include the South West and the West Midlands. On a national basis, the balance of respondents expecting house prices to fall was -10%.

Bloomberg listed some of the respondents’ comments about the London market.

Buyer Interest Collapse

“We usually have buyers registering, keen to move before Christmas, said Alan Fuller of Allan Fuller Estate Agents in Putney. “So far we are registering 80 percent less than normal during October. Vendors more receptive to price drops and some are agreeing to 10 percent reductions, which are then attracting interest.”

 

Limited Transactions

“October saw buyers more prepared to make offers, many at levels that vendors (who are under no pressure) are not willing to accept, limiting the value of transactions,” said Robert Green of John D Wood & Co. in Chelsea.

 

Brexit Uncertainty

“The market is slowly adapting to higher” stamp duty, said Christopher Ames of Ames Belgravia, “but still not coping with the Brexit uncertainty.”

 

10% Below

“Market remains active up to 1.5 million pounds, whereas above 2 million pounds offers are coming in around 10 percent below asking,” said JJ King at Andrew Scott Robertson in the Merton borough. “Instruction levels are slowing although valuations are up.”

 

Luxury Homes

“The prime London market shows signs of regaining momentum,” James Crawford of Knight Frank said. Simon Aldous of Savills disagreed, saying prices across the best districts are continuing to soften with the greatest falls at the top end of the market.

 

Suppressed Demand

“Brexit uncertainty and stamp duty continue to suppress market activity,” said James Gubbins of Dauntons in Pimlico.  Terry Osborne of Tuckerman Residential in the SW1 post code was even more succinct with his one-word summary of the market: “Brexit.”

The comment which caught our eye more than the others concerned the E2 post code. Not only does it border the City of London, but parts of it have become very “trendy” in recent years.

East London Crash?

“The sales market has dramatically changed and technically crashed across the board,” said valuer Josh Homans. “In E2, the difference between asking and sale price is a staggering 20 percent.”
 

BOE Warns Popular 35-Year Mortgages Shackle Consumers With "Lifetime Of Debt"

Consumers in the UK have been on a credit binge since the Bank of England cut its benchmark interest rate to an all-time low as investors braced for the widely anticipated economic shock of Brexit – a shock that, unsurprisingly, has yet to arrive, despite warnings from the academic establishment that a "leave" vote would trigger an imminent economic catastrophe. And now, with total credit growth rising at 10% a year, the BOE is warning that the increase in unsecured lending is becoming increasingly unsustainable.

While the central bank is less concerned with mortgage debt than credit-card debt and other types of consumer credit, some at the bank are beginning to worry that the growing demand for long-term mortgages will shackle borrowers with a lifetime of debt, according to the Telegraph.

“British families are signing up for a lifetime of debt with almost one in seven borrowers now taking out mortgages of 35 years or more, official figures show.

Rapid house price growth has ­encouraged borrowers to sign longer mortgage deals as a way of reducing monthly payments and easing affordability pressures.

Bank of England data shows 15.75pc of all new mortgages taken out in the first quarter of 2017 were for terms of 35 years or more. While this is slightly down from the record high of 16.36pc at the end of 2016, it has climbed from just 2.7pc when records began in 2005.”

The steady rise has triggered alarm bells at the BOE, prompting regulators to warn that the trend risks storing up “problem[s] for the future” if lenders ignore the growing share of households prepared to borrow into retirement. Indeed, bank figures show one in five mortgages today are between 30 and 35 years, up from below 8% in 2005, as the traditional 25-year mortgage becomes less popular.

There’s also the unaffordability question. That borrowers are opting for longer mortgage terms means they’re finding rent and mortgages are growing increasingly unaffordable, a worrying sign as credit expands.

David Hollingworth, a director at mortgage broker London & Country, said the trend showed that an increasing share of borrowers were “struggling with affordability pressures, and deciding that lengthening the term will offer leeway” as house price growth continues to outpace pay rises.

Sam Woods, the chief executive of the Prudential Regulation Authority, has said policymakers are watching developments closely.

“If lenders become too narrowly preoccupied with the profile of the loan in the first five years” and not look at the entire profile of the loan when assessing affordability “this could store up a problem for the future,” he said in a speech.

While interest rates are expected to stay low, the pound’s 15% drop against the dollar since the last year is driving up the price of consumer goods, adding to the pressure on borrowers. Prices of consumer staples are growing at an annualized rate of 3%, far more than interest rates on savings accounts.

 

New Home Sales Collapse In December As Trump Rate Surge Hits

With soaring mortgage rates and plunging mortgage applications, it should be no surprise that new home sales crashed in December. Analysts expected a modest 0.7% decline but sales crashed 10.4% - the most since March 2015 - and at 536k SAAR, this is the lowest since Feb 2016.

First annual decline since February...

Home sales in The Midwest crashed 41% sequentially and 29% YoY.

The supply of homes for sale increased to 5.8 months, the highest since September 2015, from 5 months in November. There were 259,000 new houses on the market at the end of December, the most since 2009.

This is the first clear indication that higher rates are crushing the housing market...

And Median home price surges to $322,500, second highest in series history, just lower than the record $323,700 in September

As Bloomberg points out, the figures indicate that the increase in mortgage rates curbed momentum in the housing market after steady job gains and historically low borrowing costs helped push full-year sales to the highest since 2007. Stricter lending standards also remain a hurdle for buyers this year.