London’s property boom is losing its fizz
05-25-2014
Even the super-rich are baulking at rising prices in the capital and would-be buyers are wary of a rise in interest rates
The market may be topping out, even before the Bank of England, headed by Mark Carney (pictured), begins its threatened deployment of big-bazooka measures to cool things down
By Jeremy Warner
In economics, as in politics, perception nearly always lags the reality. For anyone with their finger on the pulse of the UK economy, it was obvious long before it showed up in the official data that things were picking up fast. And yet until quite recently, the headlines reflected a different narrative – one of stagnation, of an economy struggling to escape the shadow of the financial crisis, of double and triple dips.
I wonder if the same is true, in reverse, of London’s apparently red-hot housing market. In recent months, the language of economic paralysis has given way to talk of a runaway boom – yet the market may (whisper it softly) be topping out, even before the Bank of England begins its threatened deployment of big-bazooka measures to cool things down.
Admittedly, there is as yet very little evidence of this in the accepted economic indicators, many of which continue to point to house price inflation in the capital of almost 20 per cent a year. Yet for a while, a distinct nip in the air has been apparent in the “super-prime” markets of central London. The Duke of Westminster’s Grosvenor Estate, that most canny of residential property owners, recently took the opportunity to offload hundreds of millions of pounds’ worth of property in Mayfair and Belgravia, so silly had prices become. And it is not just the playgrounds of hedge fund bosses and Russian oligarchs that are feeling the chill. Long-favoured spill-over districts for those no longer able to afford Chelsea and South Kensington are also experiencing something of a hiatus. Properties aren’t selling, and those that do are frequently failing to achieve asking prices. “The market has come right off,” says one insider with his nose to the ground.
Viewed in this light, the imminent stock market flotation of Zoopla, the online property website, for some ridiculous sum of money may be something of a last hurrah, like the sky-high price put on the estate agent Foxtons back in 2008.
Of course, given how far asking prices had risen, it would be hard to characterise this cooling-off as anything remotely resembling a crash. Indeed, the waning of interest in London’s more expensive districts may be creating boomlets elsewhere, as buyers seek the refuge of cheaper boroughs, or move out of the city altogether. All the same, what happens in the more fashionable parts of the capital will always spread out to the rest in time – and eventually set the tune for the country as a whole.
So what’s going on? Certainly it’s got nothing to do with increased supply of housing. On that score, the alarm bells are still ringing loudly, despite the recent pick-up in construction. Housing starts rose 24 per cent last year, but much more needs to be done. Everyone agrees on the need for more housing, yet there are few areas of public policy as devoid of meaningful action and solutions.
Research by Savills reveals that a pitifully small number of local authorities have embraced the growth agenda set out in the National Planning Policy Framework of two years ago. Of the 50 which have set out a plan, as demanded, only 15 (30 per cent) promise to deliver more homes than under the previous planning system. By general agreement, housing starts nationally need to roughly double, to around 240,000 a year, to keep up with demand. So if house price inflation is about to abate, it’s got nothing to do with improvements in supply, or any likelihood of them.
Another possible explanation is that the rather minor cooling measures introduced by the Bank of England are already having some effect. Mortgage lending has been withdrawn from the Bank’s Funding for Lending scheme, while new Mortgage Market Review rules seem to be having an appreciable effect in terms of dampening the rate of mortgage approvals and the very high loan-to-income ratios of the London market.
It is also possible that the growing likelihood of an interest rate rise this year is making people think twice about the affordability of their borrowing. Bank rate has been at virtually zero for more than five years. Originally introduced as an emergency measure to fight the post-Lehman crash, these very low interest rates have assumed an air of permanence, encouraging people to borrow much more than they could afford if rates ever returned to normal.
The Bank of England has tried to reassure everyone that this is extremely unlikely in any foreseeable future. We are such a highly indebted nation that there is a limit to how far rates can rise without once more plunging the economy into recession, forcing rates lower again. None the less, even the relatively small increase in rates that is now approaching will be difficult for some to manage. This may already be acting as a deterrent to non-cash housebuyers.
In practice, however, the hiatus we are witnessing in some parts of the London housing market may have a more obvious, overarching explanation – that buyers have simply been priced out of the market, or otherwise reached the limits of their tolerance. Prices are so eye-wateringly high that even the super-rich are beginning to notice.
Crushing the life out of demand through high prices and restricted credit is an extraordinarily bad, growth-destructive way of solving a housing shortage. Regrettably, it is for now the only tool available.