Have we seen London’s 10-15 year peak?

jac89

First- my situation, bare with me..
My gf and I currently rent in SW2 London and have finally managed to save enough deposit to be able buy something we want.
We found a 3 bed flat (we were only looking for two beds) in SW16 for well below our budget.
The offer accepted is a bargain, around 50k-75 less than equivalent flats sold for in January. Largely because the seller is a BTL landlord who is desperately needing/wanting a quick sale.

So this got me thinking about current (London only) house prices and whether the peak we saw two years ago, will be the top for decades.
I’ll explain why below. But obviously this also poses a big questions for me, should I be buying at all now in London? Even if I can afford the cheap mortgage and not be renting, it’s not so clear cut.

Here is why I think there may be a steady decline in London house prices for a sustained period.

The increase since the credit crunch has been fuelled by a mixture of:
-1 Foreign investment (and money laundering) mostly at the top end of the market.

-2 interest rates and BTL frenzy. Interest rates were virtually zero and yields were high. It eventually Became easier and easier to borrow and rents were increasing.

-3 London attracted many working immigrants due to the strong pound which increased demand. Also while the rest of the UK struggled here were always jobs in London.

4- Help to Buy.
This was the stupidest way for the government to deal with the affordability issues of housing. Instead of building more houses and increasing stock, at a time whe interests rates couldn’t really be any lower, they decided they needed to cheaply loan out and given (ISA) people money to buy. But what properties? Only new builds-, built by their Developer friends. So this meant developers instantly increased the price of these flats and houses 20-30% above a non- new build equivalents and further inflated the market.

So that was the uptick.. now here’s how I can see the downfall:
Foreign investment was clamped down on in 2015/6 and we started to see a ripple effect starting with prime London and slowly cascading down largely due to stamp duty changes at the top end. It’s also becoming harder for these investors to get their own money or of their countries. (E.g. China).
For BTL - Since the new tax laws and mortgage interest rules were introduced it has became less appealing and profitable to be doing renting, especially in London and also rents eased slightly (at least plateaued)
Since Brexit many financial jobs moving it to the EU and also firms moving office to Birmingham for example.

The current situation is: after years of cheap cheap borrowing, together with dishing out even more under the HTB scheme, many flats remain empty and unsold, people who have bought these flats under HTB are going to be looking to sell soon. But, to who? They will discover their flat is worth 20-30% less than they originally thought and prices will ripple through. Increased housing stock.
At the same time, BTL landlords are running for the exit. More stock.
And finally. Interest rates can only really go UP. Decreased demand.

House prices are dropping now, with rock bottom interest rates, and the government has no other means of propping it up.

So I’d like people to challenge the points above.
Is it a really stupid time to buy now, or am I questioning my decision too much?

Would love to hear your thoughts!

zagubov

There's a bit of a downswing in some areas, and it's getting marginally easier for people to get a foot on the housing ladder.

Not bothered by it. Prices around here are inflated by speculators and absentee landlords and it gets in the way of providing affordable housing for the people that keep the city functioning.

The zigzag has a a generally upward slope so if I was looking to buy, I would go for it before the numbers start adjusting upwards.


Whatever you do, don't compare your flat/house and garden with what you could get for the same money elsewhere. It's still all rabbit-hutches and tarted-up sheds around here.

buglawton

A lot of good points in the OP.
Reasons however why therell be an eventual floor on those London prices, especially in the more sane categories:
- Every selling BTLer means a tenant looking to rent or buy somewhere else in London.
- Those HTBers that are selling up - where are they planning to move to?
- Despite bad Brexit sentiment, theres still a steady increased net number of EU nationals settled in the UK year on year. Plus those medically qualified ones where the immigration quota has been lifted to all comers.

Todays You and Yours on Radio 4 had a feature on London house prices, quite a good piece.
https://www.bbc.co.uk/programmes/b0b6hrlf

westernpromise

Don't forget the disincentives to sell.

- CGT: if you never sell you never crystallise the bill,and meanwhile you get the rental yield on money that's not yours
- the tax penalties on people who buy a second property; why would anyone sell if there's the remotest chance they'll later want to buy back in?
- the yield; unless you're an abject muppet, nil cashflow from your property empire is very unlikely but entirely possible from eg shares

If the government wanted to lower property prices without howls of outrage, the simplest thing in my view that it could do would be to offer a three-year holiday on BTL CGT. This would save me over £100k and would be enough to persuade me to sell. I wouldn't care if my £1milion property dropped £50k because I'm still saving £50k.

GreatApe

There is no way they will give a holiday on CGT however maybe they could reduce it to the normal rate of 18% rather than the higher 'property rate' of 28%. However even that is unlikely.

Anyway interestingly enough BTL numbers already fell in 2017 for the first time in a long time both in nominal numbers and more so in percentage of the stock.

If they want it to fall further all the need to do is increase the second home stamp duty surcharge further. Put it to +5% or even +10% and it kills the BTL buy side and since landlords are constantly both big buyers and big sellers the buy side goes towards zero while the sell side remains at hundreds of thousands of units a year. It would result in a rapid contraction of the rental stock.

I do not think this will reduce average national prices but it could have an impact on areas that are traditionally much higher rental levels. Eg inner London. It would also have a small uptick on rental levels

GreatApe

The average buyer keeps their home for 22 years before selling. That means even if prices are flat in nominal terms it makes no sense to wait.

The nominal economy grows by around 4% a year (2-3% inflation plus 2% growth) which means over a 22 year period wages and costs are 120% higher in nominal pounds. That means even if there is a huge 55% real term house price crash over a 22 year period you are still no worse off buying now than waiting 22 years.

westernpromise

The trouble is that the state would get (arguably already is) addicted to obscene and socially harmful levels of stamp duty, and would thus be unable to do what's necessary once the privately rented sector shrinks below the size it needs to be.

Reducing CGT would only assist those who already own and who are holding rather than selling because CGT is too high. If I sold my place and paid off the mortgage and the CGT I would not be able, with the residual equity, to replace the rental income from it via comparably secure investments.

GreatApe

westernpromise wrote: »

The trouble is that the state would get (arguably already is) addicted to obscene and socially harmful levels of stamp duty, and would thus be unable to do what's necessary once the privately rented sector shrinks below the size it needs to be.

Reducing CGT would only assist those who already own and who are holding rather than selling because CGT is too high. If I sold my place and paid off the mortgage and the CGT I would not be able, with the residual equity, to replace the rental income from it via comparably secure investments.

Nobody likes paying tax but the state does need to raise money.
I think stamp duty is a reasonable tax but it could and should be improved by allowing a refund on stamp duty in a way that takes account of length of ownership.

Over the average 22 year ownership period stamp duty isnt too bad the problem is it does not work quite like that because while the average ownership time might be ~22 years some people might buy and sell in 2 years in which case their 'annulised' stamp duty is 10x higher than the average 'annualised' stamp duty. So I would have it refunded on a ratio of (25-n)/25th

If you buy a £1million house and pay £43,750 in stamp duty and sell it 2.5 years later you would get a refund of 22.5/25th of your stamp duty. So the state refunds you 90% of the stamp duty you paid 30 months earlier.

In the case of buying a house for £1m living in it for 2.5 years and then selling it to move and buy another £1m proeprty your net stamp duty for moving would just be 1/10th of what it currently is.

That way the stamp duty changes from a transaction tax to more of a annual property tax (but paid up front). The total take will be similar but it will be less of a discouragement from moving than the current system is.

Personally I am ok with the +3% additional stamp duty for landlords but I wouldn't have it any higher. I would put it to +5% if the rental stock surpassed 20% of the housing stock and reduce it to +1% if the rental stock fell below 15% of the housing stock.

buglawton

Like many taxes stamp duty suits the rich who can afford to simply hold property regardless. While penalising those who have to sell and buy due to actual life circumstances. So Ape, your logic is impeccable but it aint gonna happen.

jac89

westernpromise wrote: »

Don't forget the disincentives to sell.

- CGT: if you never sell you never crystallise the bill,and meanwhile you get the rental yield on money that's not yours
- the tax penalties on people who buy a second property; why would anyone sell if there's the remotest chance they'll later want to buy back in?
- the yield; unless you're an abject muppet, nil cashflow from your property empire is very unlikely but entirely possible from eg shares

If the government wanted to lower property prices without howls of outrage, the simplest thing in my view that it could do would be to offer a three-year holiday on BTL CGT. This would save me over £100k and would be enough to persuade me to sell. I wouldn't care if my £1milion property dropped £50k because I'm still saving £50k.

All true points, there are huge disadvantages to selling. But per my OP, the BTL issue is just one of the factors, and people die, and get divorced.
What I am imagining is something similar to Japan where there was a sudden increase above the trend due to huge stimulus and low interest rates : My point is, interest rates can’t go lower, the government is giving away money to first time buyers.. so money has never been easier or cheaper to get.

Also as an aside, I’m 29- so many friends my age have accepted the fact that interest rates should be where they are and don’t know any different. (Who can blame them, as they’ve never seen any different). But it would be interesting to see the fallout with increased interest rates combines with when all of these HTB loanees have to start paying interest..

movilogo

https://www.theguardian.com/business/2018/jun/25/countrywide-property-sales-uk-estate-agency-profit

Property market is stagnant. With Brexit on horizon, price will only go downward from here.