London property vulnerable to downturn

By Neil Behrmann

March 08 :- The London and UK residential property boom is well and truly over. In the past few months prices have begun to slip, in what has become a buyer's market.

The slide has been especially evident in north England and the Midlands as the growing numbers of new apartments have failed to attract new buyers and tenants. In cities such as Manchester and Leeds, estate agents and residents have reported that a sizeable proportion of new buildings, with one and two-bedroom apartments, is empty. Aspirant landlords who were hoping to let the flats have been trying to sell the apartments as the mortgages on some of these properties are in many cases 90 to 100 per cent of the value.

Hometrack, a property information group, has reported that house prices in England and Wales fell for a fifth month in a row in February. Nationwide & other surveys have similar results. The only difference in opinion is the extent of decline.

London property begins to sag

The London property market has also begun to sag in tandem with the stock market slide, the pricking of the private equity and hedge fund bubble and an end of the mergers and acquisitions boom.

Adding to the problem, changes in non-domicile taxation for wealthy foreigners and international employees in London have led to a decline in demand for prime property. These are the popular areas such as Chelsea, Kensington and St Johns Wood. Previously 'non-doms' were not taxed on income and capital gains on assets held outside the UK. Now the latest Budget rules that if a taxpayer wishes to remain 'non-dom' they must pay an annual levy of £30,000 ($60,000). Inland Revenue studies on non dom taxation and the levy have raised fears that the non dom tax regime will be changed again in the future. This uncertainty has caused foreigners to begin selling houses and apartments.

'The global credit crisis and consequent financial market volatility have taken their toll on prime central London property,' notes estate agent Savills in a report. 'Compared with the third quarter of 2007, values in the final three months of 2007 fell by 2 per cent. This was the first fall in three years.'

Savills estimates that gross average rental yields are only 4 per cent, about 1.5 to 2 per cent below the level of current mortgage rates. Now that capital values are either stagnating or declining, landlords are losing money. If the trend continues as several economists predict, owners of these so-called 'buy to let' properties will be forced to sell, adding to the supply and pressure on prices.

Prospects for the city sector and the wider global economy are currently uncertain, notes Savills. This uncertainty is likely to deplete rental demand from corporate tenants and suppress rental levels going forward. In 2007, half of London's tenants worked in the finance sector and as many as 70 per cent in central London. With the extreme volatility in financial markets, weak investment bank results and rising redundancies, it seems likely that corporate tenant demand will be lower, adds Savills. On the other hand, rental demand could increase as families delay buying houses and apartments. Overall rental increases are expected to be subdued in 2008.

Mortgage strains begin to show

Mortgage approvals and asking prices are both key indicators of future market conditions. Asking prices have been falling in London and wider UK regions for several months. This illustrates the change in market sentiment and contrasts with heady buying in the first half of 2007, when buyers were recklessly overpaying for properties in what had become a real estate


The failure and nationalisation of Northern Rock, the UK mortgage lender, has precipitated much more conservative bank lending. Mortgage issuers have become more selective about their customers and turnover in the property market has fallen sharply. The Bank of England says that mortgage approvals fell from 81,000 in November to 73,000 in December, the weakest lending rate since 1995. Shrinking lending has continued in the first few quarter of 2008.

'The housing market faces its greatest period of uncertainty since the early 1990s,' notes Richard Donnell, director of research at Hometrack. But he doubts whether there will be significant price falls as owners are reluctant to cut prices. Much depends on the levels of employment in the City and the extent of owners' debt burdens. The super rich, who have been purchasing homes of £5 million ($10 million) or more, are virtually unaffected by these trends. But the changes in non-domicile tax may hinder their desire for property in London.

London real estate still exceedingly pricey

While estate agents and property market businesses and consultants are cautious, they are relatively sanguine compared to City economists who are experiencing the dangerous and broadening credit crunch. Goldman Sachs, ABN Amro and Dresdner Kleinwort are all predicting UK property price declines in 2008 and 2009. This is hardly surprising. London property prices have almost doubled in the past two to three years and are exceedingly expensive for both local and international buyers. According to the Land Registry index of houses and apartments traded, average prices in Kensington and Chelsea are £856,000 ($1.7 m), City of Westminister (£612,000); Tower Hamlets, near the financial centre of Canary Wharf (£376,000); and favoured areas such as Richmond ( £455,000); Islington (£450,000); Barnet (£355,000); and Camden, including Hampstead for £538,000. But these are averages of properties ranging from small apartments to semi and detached houses. In practice, house prices in Chelsea and Kensington tend to trade above £2.5 million ($5m) with prices of £2 - 4 million ($6m) in areas surrounding Hampstead, St Johns Wood, Islington, Richmond and Wimbledon. Two-bedroom purpose built apartments in these areas can fetch between £400,000 and £800,000 ($1.2m).

    Households' include interest and repayments; corporations, interest only

                                         (Source:- Citigroup & The Times)

London residential real estate downturns occurred in the mid seventies, early eighties and between 1989 and 1994. Prior to those declines nominal interest rates soared. Property bulls maintain that the rise in interest rates in 2006 and 2007, was much lower than levels in previous booms. They believe that at worst the London property market, with high immigration from Eastern Europe and elsewhere, will consolidate. This analysis is only partly correct. The level of real, inflation adjusted interest rates, is the key factor, not the nominal rate. In the seventies, nominal interest rates were in their teens, but real interest rates were negative. In 2006 and 2007 real rates were relatively high. In Japan, interest rates were down to almost zero, but due to deflation the property market continued to be weak.

The chart also illustrates that it is the extent of the debt burden that hurts. The overall size of London household debt has soared to finance the purchase of sky high property prices. The interest and capital repayment on the mortgages thus absorb a major proportion of after tax disposable incomes. Only the very wealthy, unencumbered by borrowings, are immune.


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