The rain in Spain stays mainly on the plain

London Property Market Review.
Spring has sprung and, at the time of writing, the rain seems to have gone to Spain. This makes quite a welcome change for the south of England, which has had the wettest winter since records began, and has left the local councils in the West Country shaking their heads over how to deal with (and pay for) the damage. It may be worth remembering that, at the end of summer 2013, these same councils paid the Met Office for a long-range forecast in order to plan for the winter. The reply came back that although it was difficult to forecast these things with a great deal of certainty, they expected “a drier than average winter, especially in the West Country”.

In a similar vein, there is a well-known national think tank, hugely popular with the press, that year-after-year issues apocalyptic predictions of doom for the property market and – save for 2008 – serially gets proved wrong. I have said for some years now that the time to batten down the hatches and prepare for financial squalls is when this particular company forecasts strong growth and good times ahead for all of us.

So a question that someone who is looking into the world of prime central London with an outsider’s eye might ask is: “what hard facts are we confronted by today that might give us a pointer on where things are headed?” The following points spring to mind, and not all of them are pleasant, so I haven’t candy coated them as I think that they will say different things to different people.

Prices are higher now than they ever have been. If you take 2008 as temporarily having been the peak of the market, prices for the best of the best are at least 20% up on where they were then.
The supply of property is short and the volume of transactions is down from the peak of 2001 – we saw less that half the number of transactions in 2013, and 2014 is likely to be worse.
In 2002, home-ownership was running at 70% – in 2013 that figure was 64%, and is likely to fall further as the difficulties in getting an initial foothold on the housing ladder become more acute.

Interest rates are still at the lowest rate that anyone can remember, but this is a double-edged sword. If you need money (and can borrow it) it has never been cheaper; if you have money and want to put it in the bank it will earn next to no interest.

In 2013, Knight Frank said that buyers of 71 different nationalities bought homes through them. Contrary to popular belief, less than one third of all their buyers put together came from Russia and the Middle East.

The average house price in Greater London in October 2013 was 475,940; even assuming for a moment that the buyer of such a property could get an 80% mortgage, that means that they would have had to have had 95,000 in their back pocket. Bear in mind, this is the ‘normal’ domestic English market, not prime central London.

25% of the nation’s annual income tax derives from within the M25 – and I am willing to bet that at least 75% of that figure comes from businesses within 4 miles of Trafalgar Square.
To meet housing demand in the south east of England, most experts agree that we need to build 250-300,000 new homes per annum. At present, we are building less than 80,000.
So, if I were to lean forward and put my neck on the block and offer a prediction for 2014, what would it be? The answer seems straightforward to me. Until more people leave London than arrive, the supply of property will get shorter, demand will get stronger, and prices will continue to rise.

Already, we are seeing the gentrification of formally second-rate areas, whose standings are being revised because of proximity to nicer areas. For example, where I live in north Kensington was until recently thought of as a rogue part of the Royal Borough that wasn’t nearly as nice as Fulham, and enjoyed the dubious reputation for being a dustbin for all of RBKC’s problem tenants and social projects. Today, it now has the usual London cast of bankers, solicitors, media folk and assorted professionals that you would find anywhere else in the borough, and with prices to match.

The dangers of being on the wrong end of this relentless march in the fortunes of London were illustrated by some potential clients who I saw in February. They arrived here in 2003 and have spent ten years renting a delightful flat in W8 and, with the owner on a long overseas posting, the initial rent has barely changed during their stay. However, the landlord has now revised the rent to 2014 levels and they wanted to see what their money (which has been in the bank since 2003) would buy them. The sad truth is that the sum which would have bought them a very nice, three-bedroom house in W8 will now barely buy them a house in Queen’s Park.

The only consistent advice that I could give a buyer today is to buy the best property they can in the best area they can afford, buy for a long stay, and be cautious not to get over-extended. But don’t stand and stare for too long, as the world doesn’t stand still.

Perhaps all of this merely goes to show that elaborate prognostications are a bit of a mug’s game, unless you are confronted by facts and indications that are very difficult to misinterpret. Even then, there is always the possibility of the October 1987 Michael Fish elephant trap: “Earlier on today, apparently, a woman rang the BBC and said she heard there was a hurricane on the way; well, if you’re watching, don’t worry, there isn’t, but having said that, actually, the weather will become very windy, but most of the strong winds, incidentally, will be down over Spain and across into France”.

Saul Empson, Haringtons UK, Spring 2014

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