London real estate at an inflection point

July 17, 2014

By George Hay

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Most real estate valuers in London think property prices in the UK capital are about to fall. That prediction has been easy to make and easier to get wrong in the last five years. This time, the evidence that global investors’ favourite housing market has peaked is looking credible.

House prices in London as a whole are still rising on a monthly and annual basis, and are 20 percent more expensive than a year ago, according to the Office for National Statistics. But there is stasis in the process upstream. The Royal Institution of Chartered Surveyors’ latest monthly survey shows a sharp dip in those wanting to buy in London, and an even sharper jump in those keen to sell.

Monthly sales volumes are off 17 percent in Greater London since December, says the Land Registry. A small majority of RICS’ members now expect values in the city to fall in sympathy.

The picture is of domestic demand falling away. That is not surprising. Median prices in the capital are 10 times average London earnings, as measured by the Greater London Authority. Banks are reluctant to advance mortgages at multiples exceeding four times salary. Meanwhile, a soft rental market is a deterrent to debt-funded investors. Rents rose just 1.4 percent in the year to March; lowly rental yields are below mortgage finance costs in some parts of the market. And UK rates may rise later this year.

This leaves the London sales market open only to those with sizeable cash resources. The city has attracted hordes of such buyers globally in a period of financial repression. But if the buyer-seller imbalance has shifted, this foreign money will need to work harder for prices to hold. The snag is that London is no longer a bargain for the global buyer. A 15 percent charge on properties bought through tax-avoiding corporate shells has already hit demand, the city’s real estate agents say. Sterling has risen 15 percent against the dollar since July 2013.

There is a near-sacred belief held in the UK, London and internationally that house prices in the city can only rise. That view might not withstand the economics of supply and demand.

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