London's foreign "cash" property buyers may be less cash-rich than you think

There are all sorts of explanations for the bubble in the London housing market, but as with all markets, in the end the truth lies somewhere between supply and demand.

On the one hand, we know that there is a shortage of supply, with too few new homes being built in the capital and many existing owners still reluctant to sell. The upshot is that prospective buyers seriously outnumber sellers (see charts below from RICS).

On the other, there is clearly a growing amount of demand for London housing. Let’s split this into three parts: 1. the credit story – domestic mortgages are cheaper and easier to get hold; 2. the domestic incomes story, with Londoners earning comparatively more than their regional counterparts; 3. the foreign demand story, with overseas investors lining up in their droves to buy London property.

Unfortunately the third of these elements is often misunderstood. There’s a widespread assumption that the vast majority of overseas buyers are Chinese billionaires or Russian oligarchs. In part this impression is reinforced by the idea that these foreign buyers are paying for their properties in cash. After all, CML numbers suggest that at present there is a bigger proportion of cash-only property buyers in recent UK history.

The distinction is an important one. If London prices do indeed fall, the bubble is far less likely to deflate quickly and painfully if many of the recent transactions represent cash buyers, who can afford to sit on their losses for a few years. If, on the other hand, the properties are being bought by people with large mortgages, even a small fall in prices could leave them underwater, and therefore more likely to sell up in a panic if the mood music, or their situation, changes.

However, what the numbers above fail to show you is the proportion of foreign buyers who are actually reliant on a mortgage procured not in the UK but overseas. If, for instance, you are a Malaysian investor who takes out a loan in Malaysia for a London property, because the money is not being borrowed in the UK that transaction shows up as a cash purchase in the CML and HMRC registers.

This makes tracing the financial position of foreign buyers of London property difficult. But the anecdotal evidence suggests that many of those who are buying flats and new-build apartments in the capital are financing themselves in local markets in Asia.

Take this except from an email I received from a Singaporean investor:

The credit situation in London is also extremely tight, at least from a Singaporean perspective.  Let me give you a concrete example.  In the UK market, banks usually lend 2.5X to 3X of the applicant’s annual salary as the maximum amount of loan.  In Singapore, this figure is easily 10X.   Yes, almost all our London purchases are now financed through Singaporean banks as the credit is so much harder to get from a UK bank.

Now, this email was intended to be a riposte to my concerns about the London housing market, but the bit above only makes me even more concerned.

The reality is that a chunk of demand for London housing is reliant on finance from Asian and other overseas markets. There are two upshots: first, these buyers may be far more sensitive to a slight downturn in London housing prospects than the UK statistics might imply. Second, this element of London housing demand could be extremely vulnerable to a foreign financial crisis. Given how much concern there is about a possible blow-up in the Chinese shadow banking sector, this is something Londoners would do well to be aware of.