– London property bubble bursting? UK in unchartered territory on
Brexit and election mess
– Evidence of downturn in London housing market
– Over 75% of London homes now selling below asking price
– Prime north London property down 6 per cent annually
– House prices have not fallen for three consecutive months since the
2009 crisis
– Bank of England report expresses worry over UK property market
– ‘Adverse shock’ to UK economy may amplify negative feedback
loop
– Increased political and economic uncertainty has weakened fragile
London buyer sentiment
– Bank of England Financial Stability Report: “Mortgages are the
largest loan exposure for UK lenders”
– BOE FSR refers to a “self-reinforcing feedback loop” that, if
triggered, would cause another 2008-style crisis in the UK
Is the London property market heading for tough times? The most recent
housing figures and a new Bank of England report suggest it may well be.
Recent figures show that 77% of London houses sold in May went at below
asking price, up from 72% in April. London as the capital of UK reflects
international market but international investors have major concerns over
uncertainties namely Brexit and the current state of the government. As a
result London house prices are rising at their weakest rate in five years (if
they are rising at all).
In prime estate London things are particularly bad, with prices in prime
north and north west London falling by 6% in the last year.
Across the country, price drops in May signalled the third consecutive
monthly drop, something which has not been seen since the 2009 crisis. Banks
are well aware of what this could mean for them and as a result are now
offering mortgages that scream ‘bubble bursting!’
Rates for 90% loans have tumbled to as low as 1.9% for two-year deals and
just 2.55% for five-year fixes.
Yet, cheap mortgages are not enough. Buyers are getting worried whilst
homeowners increase their desire to sell their properties, CityAM reports:
‘prospective buyers registering with estate agents fell from 381
people per branch in April to 350 in May, although that was up from 304 at
the same time last year. The number of homes available rose 11 per cent to 40
per branch, up from 37 per branch in May last year.’
Danger for mortgage holders
Of course one of the major threats to the property market is not only the
affordability of housing but the cost of borrowing.
The BoE’s Financial Stability Report draws attention to just how sensitive
the country is to interest rate rises. Not only was ‘80% of new mortgage
lending in 2016 either on a fixed rate for a period of less than five
years or on a floating rate’ but ‘”mortgages are the largest loan exposure
for UK lenders.’
This means that the next rate decision by the MPC in August will not only
be taking into account concerns over the growing rates of real inflation but
also the impact of a potential rate rise on millions of UK homeowners.
Should a rate rise occur then we will likely see a downward spiral which
will leak into the rest of the economy. As homeowners struggle to keep up
their unaffordable mortgage payments they will delay defaulting on their
homes and instead avoid paying other debts such as credit cards and car
loans.
Of course, a rate rise is not the only concern right now. Just the simple
matter of having an economy with jobs so homeowners can actually pay their
mortgages is a pretty key thing to try and manage. One of the more concerning
charts in the BoE’s report is the representation of what would happen if UK
unemployment increased from just below 5% as it is currently, to 8%.
This small move in unemployment would result in twice the number of
households who have high debt service ratios — the most fragile
mortgages out there. The estimate is represented by the yellow diamond in the
chart above.
Adverse Shock? Which one to pick?
In the FSR from the BoE, an ‘adverse shock’ is referred to. It is this
which will impact jobs, push up rates and ultimate lead to a negative
feedback loop that will ‘amplify a downturn’.
The bank states, a ‘feedback loop between house prices and credit also
arises in a downturn. An economic slowdown can reduce house prices. Due to
the role of housing as collateral, lower house prices reduce the demand for,
and supply of, credit. Expectations of further price reductions, which can
result in sales of houses at heavily discounted prices (‘fire sales’), can
further amplify house price falls, reinforcing the adverse feedback loop. The
resulting deterioration in borrowers’ and lenders’ resilience will
intensify a downturn.’
Brexit is the most obvious adverse shock for the UK economy at present but
this does not mean that homeowners should take comfort from Mrs May’s
positive negotiations. The truth is, we have no idea what the final Brexit
package will look like or (more importantly) how it will really affect the UK
economy.
The UK and its homeowners are at a real risk of being blinkered by Brexit.
The FSR is clearly trying to present the divorce from the EU as an ‘adverse
shock’ (they have a special section on Brexit) but readers must remember this
is not the only threat to the bubble. As we explained in yesterday’s comment
on shrinkflation in relation to price inflation, the issues in the housing
market have been there for many years.
Brexit is the latest scapegoat for the struggling housing market. One
headline in a local London rag reads, ‘Brexit to blame: prime north London
property down 6 per cent annually.’
Yes, Brexit may well be the final trigger, but the pieces were all lined
up for the gun to fire.
News and Commentary
Interview
with Goldcore at Mining Investment Europe (YouTube.com)
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