The British housing market is in crisis. Last year, I wrote about the alarming divergence in the affordability index, and evaluated the affordability ratio rising to 8:1, meaning that it would take eight years of saving the average wage to afford the average home. For London, this index has rocketed in the past year, driven by stagnating wage growth, and an increase in property prices for “affordable homes” in previously cheaper areas such as Romford and Dagenham. London’s affordability index now stands at an unprecedented 13:1. The inability to afford housing is reflected by CityLab, who estimate that by 2025, rentals will outnumber homeowners in London by 3:2. This is surely indicative of an unsustainable bubble reaching its climax. If house prices continue to diverge from wage growth in this trajectory, then soon it will be impossible for the any young professional to get a foot on the housing market. However, it seems as though this trajectory may finally change direction in the coming months.
For the past 10 years, it seemed unquestionable that the UK property market would turn. Property investors were transfixed in the same myopic optimism that drove the American market to the unsustainable bubble of 2007-2008. However, the calamitous impact of Brexit uncertainty may indeed act as the pin to pop this bubble.
In order to evaluate how Brexit may lead to a downturn in the UK property market, it is first important to understand the traditional pricing mechanism of the UK property market, and how pricing trends tend to fluctuate throughout the economy. Historically, the most valuable properties in the UK “set the trend” for less-valuable properties. This is known as the “ripple effect,” as if valuable London properties experience a gradual increase in prices, then following a lag time, the rest of the property market will also experience a proportionate increase in prices, hence the price trend ripples from high-value properties (Prime London- Westminster, Kensington, Mayfair and Chelsea) to lower-value properties (Dagenham, Romford and Ealing).
It should therefore logically follow that a fall in “prime London” property prices, ought to ripple throughout the wider property market, and potentially signal the beginning of an property crash. As it so happens, the impact of Brexit may have a proportionally larger impact on these “prime” properties than any other economic event in the past 30 years.
Foreign investors have been attracted to the prime London market for many years now.
Regarding the attraction of the London market to foreign investors, Richard Garside, Director for BNP Paribas in London, said: “All parties are attracted to London by the high quality of investment stock and the mature and transparent nature of our market.” Investors seek the political and economic stability that Britain affords relative to their own home nations, with 28% of foreign purchases coming from Hong Kong, and 20% from Singapore. However, with the current political instability of Brexit, the market is experiencing a “Brexodus” of foreign investors who have lost confidence in the UK market, and no longer see the UK as a politically stable nation attractive for investment. This is combined with the newly imposed Chinese and Malaysian restrictions on capital leakages from the economy (no doubt a reflection of the new wave of nationalism and rejection of globalisation in response to Trumponomics), that makes it harder for foreign investors to invest in countries such as the UK. Consequently, we are seeing a dramatic reduction in foreign interest in the UK property market, and are seeing a greater number of foreign investors placing their “prime properties” on the market for highly discounted prices in order to leave the UK before the impact of Brexit crystallises.
In order to understand the impact that a reduction in foreign investment may have on the London property market, one must understand the extent to which the prime London market is dominated by foreign ownership. It is estimated that between 2014 and 2016, foreign buyers accounted for a third of purchases in “prime London”. In 2015, Business Insider released a report in 2015 (link here), detailing the extent to which these expensive boroughs are dominated by foreign ownership. The map below of central London highlights the extent to which London property (especially in the most expensive boroughs) is controlled by foreigns owners. Speaking to a London estate agent, it was revealed that One Hyde Park (the most expensive piece of real estate in London), is almost entirely owned by foreign investors, and since its opening in 2006 has had a peak occupancy rate of just 17%. It is a very similar story for other exclusive new builds such as One Blackfriars, of which 70% of the flats are foreign owned.
A culmination of the 2016 Brexit referendum, the announcement of Asian capital restrictions, and the potential threat of a Corbyn government on the horizon, has caused a sudden flood of foreign owned prime properties to the market, as foreign investors lose confidence in the market. Rightmove claim that the number of properties managed by the average estate agent is now 52, compared to 42-47 earlier this year. Likewise, anecdotal reports are suggesting that sellers listing their properties are receiving fewer viewings per week and it is taking much longer to find a buyer, with the average property now taking 61 days to sell, up from 56 days earlier this year.
This increase in foreign supply to the market is being met with a fall in domestic demand, as domestic buyers are similarly not willing to pump their money into falling property market. Coutts recently published the statistic that in prime London, there is now a -11.3% average discount between asking price and sale price, suggesting that domestic buyers now have bargaining power over foreign sellers, another piece of evidence indicative of the desperation of foreign owners to sell.
In essence, this means that the London prime market is finally experiencing a downturn. After years of unsustainable growth in prices, fuelling a bubble that excludes young professionals from getting on the property ladder; finally it looks as if property prices in the most valuable areas of London are falling. In many ways, this is simply a reversal of what drove the property market to this unsustainable bubble in the first place : foreign investment. Since foreign owners control such a large proportion of the prime London property market, it should figure that if Brexit would threaten the very factor that made Britain so attractive to these investors (political stability), then this will cause a “Brexodus” of foreign investment, and will consequently drive these investors to sell their prime London investments.
As discussed, if the historically accurate ripple effect does indeed hold true, then this should suggest that the fall in prime London property prices will lead to a fall in wider London prices, that will then ripple throughout the South-East and ultimately impact the whole British market. I would argue that if anything, this ripple effect will have a particularly short lag time relative to other housing market crashes, as already the British public’s propensity to save has gone up dramatically since Brexit, as potential buyers are unwilling to take out a mortgage in this toxic economic climate (as shown on the graph below.) This will mean that demand for housing will fall by an even greater degree.
Typically, a fall in house prices is synonymous with an economic downturn, as it is reflective of falling confidence in the market, and falling income levels. However, in Britain we live in an economic climate where it would take the average London worker 13 years to buy the average London property. This discrepancy between income and property prices is so vast that it excludes young professionals from getting on the property ladder, and instead limits them to constantly renting properties. This projected fall in property prices will therefore rebalance this discrepancy, and make homes more affordable for the many. As a young person intent on leaving university, getting a job, and earning a living, I am not opposed to this predicted fall in property prices, as finally this makes the prospect of owning my own home one day more likely.