Every so often the New York Times gets a bee in its bonnet about the UK economy. Not all that long ago their main concern was George Osborne’s austerity policies, which they claimed were causing irreparable damage. Subsequently, in light of Britain’s rapid recent recovery, these complaints seem to have been discontinued.
The latest hot topic for The Gray Lady is the London housing market. An op-ed in the paper this week talks of a housing boom in the capital which is fuelling deep divisions and driving out those who can’t afford to live there. It is, in fact, only the latest in a series of pieces about Britain’s benighted property market.
The problem is that, once again, the newspaper is a little behind the curve. There certainly is a price boom in London — and a massive disparity between affordability levels in different parts of the city. As Economics Editor of Sky News I’ve been charting this phenomenon, warning about the existence of a bubble in the capital and writing about how Government policy has only contributed to the problem for two or three years already.
However, things have moved on. Today the Land Registry reported that house prices in England and Wales fell by 0.2% in September; in London, the fall was 0.7%. And while the annual house price inflation numbers will take a while to reflect falling momentum (after all, prices are still comfortably higher than this time last year) it’s becoming increasingly clear that the floor may be falling out from under the market.
Consider the following charts published by the Royal Institution of Chartered Surveyors earlier this month. First, see, below, if you can spot the one UK region in which the majority of surveyors are reporting a fall in house prices:
Second, note that the appetite for homebuying has dramatically dried up in the capital. This chart shows you levels of new buyer enquiries — NB the biggest fall is, again, in the capital:
Such statistics are early warning signals — as are the copious other pieces of anecdotal evidence that the London bubble is either slowing its growth or starting to deflate: witness the performance of shares in Foxtons, the pushy estate agent. Consider the fact that transactions in the capital are drying up, according to the FT. Scan any property tracking website such as Rightmove or Zoopla. What you’ll see there is a sharp increase in the number of properties on sale in London whose prices have been reduced.
It may take some time for this to be reflected in the official Office for National Statistics index, or, for that matter, the Halifax or Nationwide indices. Such surveys tend to track housing transactions at a later stage in the chain. Even so, note the fact that the Land Registry is already reporting that house prices in Kensington & Chelsea, London’s most expensive area, started to plateau in June of this year.
As I’ve repeatedly written, house prices in London (particularly in prime areas) had reached such high levels in comparison with incomes that it was blindingly obvious that they would lose momentum at some point. However attractive an area is, in the end people need to be able to afford to live there — or else they’ll move elsewhere, or rent. So a fall in London prices might actually be a good thing for the economy.
However, a few words of caution are necessary. First, while prices are falling in certain areas of London, they remain so far above their recent levels that they remain unaffordable for many. Second, it may well be that the market is temporarily soft at the moment as investors try to work out whether they’re going to face a mansion tax after the election. Third, while activity in prime London areas (eg the smartest bits) has fallen very sharply, transactions and prices in the capital’s suburban and less affluent areas continue to rise.
Finally, property markets are unpredictable — in large part because the human beings buying and selling properties are unpredictable. It takes months for a seller to work out he or she may not be able to realise the compelling price their estate agent thinks they can make. And, on the flipside, buyers may yet pile in to make the most of low interest rates before the Bank of England raises them.
In other words, it is by no means assured that house prices in London will keep on falling. But that’s the way they are heading at the moment. And the bare economic facts remain incontrovertible: London house prices represent an almighty bubble. We should be relieved that the market finally seems to be seeing sense.