‘Super-prime property’ could be the canary in the coalmine

NorthFin

One big feature of this boom has been the way it started with a big surge in super-prime property, in areas such as Chelsea, Kensington and Westminster. This then radiated out, as people priced out of those areas moved to slightly less expensive ones. In turn, they displaced others.
As a result, notes The Daily Telegraph, Clapham, Chiswick, and even Kilburn, are the “new Chelsea”. However, this process now seems to be going into reverse, with prices in super-expensive areas falling.
According to LSL Property Services, prices in Kensington & Chelsea have fallen by 7.2% over the past year (and could fall even more if a mansion tax is introduced after the election). This should also feed through into more reasonable prices for the rest of the market.

So overall, it looks like prices could fall further. We could see falls that wipe out the last 18 months’ worth of gains – and more.
It’s worth noting that this particular boom has very much been a London-centred phenomenon. So if you’re based in or near the capital, and you’re thinking of downsizing, retiring, or moving to the country for a better quality of life, now might be a good time to consider it

http://moneyweek.com/avoid-property-the-most-popular-asset-class-in-britain/

Generali

It's probably worth noting that being anything other than massively long property in London for the past 2 decades or so has consistently been a terrible decision.

N1AK

Generali wrote: »

It's probably worth noting that being anything other than massively long property in London for the past 2 decades or so has consistently been a terrible decision.

It's definitely worth noting, though whether that should lead to the assumption that it will continue or that after 2 decades things can only go down is something I wish I could predict.

I'm sure the same was roughly true of Tokyo property after all!

Generali

N1AK wrote: »

It's definitely worth noting, though whether that should lead to the assumption that it will continue or that after 2 decades things can only go down is something I wish I could predict.

I'm sure the same was roughly true of Tokyo property after all!

Being short London property feels like being short Japanese Government Bonds (JGBs): an obviously good idea that is a widowmaker trade.

Just because an asset is blatantly overpriced doesn't mean the price will fall. Perhaps the way to look at London property is to think why it is so highly valued rather than whether it is overvalued.

JGBs are so highly valued because Japanese people trust their own Government not to muck them over by defaulting. A risk averse Japanese person, and this is the country that invented a baby boom 15-20 years before the West so has loads of retirees, puts their money into JGBs at any interest rate. History now tells us that.

So to reverse things, why would people value property in London so highly?

N1AK

Generali wrote: »

Just because an asset is blatantly overpriced doesn't mean the price will fall. Perhaps the way to look at London property is to think why it is so highly valued rather than whether it is overvalued.

So to reverse things, why would people value property in London so highly?

I agree completely which is why I wouldn't advise someone to either invest, or not invest, in London property.

There's nothing wrong with the logic of considering why something is over-valued or under-valued, however I find in practice that this can lead to the delusion of understanding it. If I could accurately model exactly why London prices were at their current level then I'd have a skill that no one else appears to have.

I'd be surprised if either of us couldn't name 20+ reasons why London property is valued highly, but we could also name a dozen or more scenarios that could lead to notable dips in prices, and likely a half-dozen or more factors that could make people heavily exposed to London property twitchy if things headed south.

IronWolf

I wish I could buy somewhere in Chelsea, but prices would have to crash maybe 80% before I could afford somewhere lol.

It's a nice area, but I do wonder why people live there in a £5m flat, when that same money will get you so much more just outside London.

padington

IronWolf wrote: »

I wish I could buy somewhere in Chelsea, but prices would have to crash maybe 80% before I could afford somewhere lol.

It's a nice area, but I do wonder why people live there in a £5m flat, when that same money will get you so much more just outside London.

Because it was a 2.5 million pound pad just a few years ago and it may be a ten million pound property before not too long.

.... and the parties are pretty good, oh and the commute to work is a walk in the park, literally, for some lucky b*ggers.

I'm cynical about global capatalism in one big respect, I think inequality will get much much worse, for that reason I'm long London property and those people can afford a place in London and a few outside too.

Killerseven

IronWolf wrote: »

I wish I could buy somewhere in Chelsea, but prices would have to crash maybe 80% before I could afford somewhere lol.

It's a nice area, but I do wonder why people live there in a £5m flat, when that same money will get you so much more just outside London.

This is very interesting, yes why would someone live there? Maybe as a way to protect their funds? Not much protection if you ask me.

cells

how many properties are there in the two-three ultra prime boroughs that you think a fall in price there will allow a big enough migration from the other 30 boroughs to make the 30-not-so-ultra-prime boroughs fall in price?

cells

Killerseven wrote: »

This is very interesting, yes why would someone live there? Maybe as a way to protect their funds? Not much protection if you ask me.

generally speaking, the homes in more expensive area of London are much bigger

So when you hear a Kensington house sold for £5m you dont see that it was a 5000 sqft house with more money spent in the interior than the average price of a London home.

Why do they choose to live there? for two main reasons, it is 5,000 sqft and if you are used to 5,000 sqft you aren't going to go into a 800sqft average England home

and they dont want to be near poor people, just like how ex-couoncil homes in council estate trade for about a third below the same sized house two streets down but on a borough scale

cells

London is driven by the lowest end homes/flats rents and even room rents

A 3 bed flat in inner London rents for £2000 per month

At a yield of 6% that income is valued at £400,000

That sets the base of the pyramid as obviously a 4 bed flat is going to cost more than a 3 bed flat. A 3 bed terrace is going to cost more than a 4 bed flat. A 4 bed terrace is going to cost more than a 3 bed

etc etc



without rents falling I dont see how prices will

And for rents to fall (at least in real terms, eg stay static for years while inflation erodes them in real terms) the capital needs to build ~50,000 homes. While it only builds less than 20,000 homes then rents wont fall, they wont stay static, they will go up and drag prices with them