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Paul Hodges argues London house prices could easily halve from here.


sancho panza

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sancho panza

For those unfamilair with Hodges,he's well worth following.His timing can be off and some of his calls miss,but his writing is always logical and well argued.

There's a lot of good analysis but this stands out:if house prices return to previous lows in hosue price/salary multiples,the bottom could be even worse.

  • They averaged 4.8x earnings from 1971 – 2000, but have since averaged 8.7x and are currently 11.8x
  • Based on average London earnings of £39.5k, a return to the 4.8x ratio would leave prices at £190k
  • That compares with actual average prices of £468k today

https://www.icis.com/blogs/chemicals-and-the-economy/2018/07/london-house-prices-slip-as-supply-demand-balances-change/

London house prices slip as supply/demand balances change

By Paul Hodges on 22 July, 2018 in Financial Events

House-prices.png

London house prices are “falling at the fastest rate in almost a decade” according to major property lender, Nationwide.  And almost 40% of new-build sales were to bulk buyers at discounts of up to 30%, according of researchers, Molior.  As the CEO of builders Crest Nicholson told the Financial Times:

 “We did this sale because we knew we would otherwise have unsold built stock.”

They probably made a wise decision to take their profit and sell now.  There are currently 68,000 units under construction in London, and nearly half of them are unsold.  Slower moving builders will likely find themselves having to take losses in order to find a buyer.

London is a series of villages and the issues are different across the city:

Nine Elms, SW London.  This $15bn (US$20bn) transformation has been ‘an accident waiting to happen‘ for some time.  It plans to build 20000 new homes in 39 developments at prices of up to £2200/sq ft.  Yet 2/3rds of London buyers can only afford homes costing up to $450/sq ft – thus 43% of apartments for sale have already cut their price.

West End, Central London.  This is the top end of the market, and was one of the first areas to see a decline.  As buying agent Henry Pryor notes:

“Very few people want to buy or sell property in the few months leading up to our monumental political divorce from Europe next March, which is why 50% of homes on the market in Belgravia and Mayfair have been on the market for over a year. Yet there are people who have to sell, whether it be because of divorce, debt or death, so if you have money to spend I can’t remember a time since the credit crunch in 2007 when you could get a better deal.”

NW London.  Foreign buyers flooded into this area as financial services boomed.  Rising bonuses meant many didn’t need a mortgage and could afford to pay £1m – £2.5m in cash.  But now, many banks are activating contingency plans to move some of their highly paid staff out of London ahead of Brexit.  Thus Pryor reports buying a property recently for £1.7m, which had been on the market for £2.25m just 2 years ago.

W London.  Also popular with foreign buyers, even areas such as Kew (with its world-famous Royal Botanic Gardens) have seen a dramatic sales volume decline.  In Kew itself, volume is down 40% over the past 2 years.  And, of course, volume always leads prices – up or down.  Over half of the homes now on sale have cut prices by at least 5% – 10%, and the pace of decline seems to be rising.  One home has cut its offer price by 17.5% since March.

Outer London.  This is the one area bucking the trend, due to the support provided by the government’s ‘Help to Buy’ programme.  This provides state-backed loans for up to £600k with a deposit of just 5%.  As Molior comment, this is “the only game in town” for individual purchasers, given that prices in central London are out of reach for new buyers.

House-prices2.png

The key issue is highlighted in the charts above – affordability:

  • The first chart shows how prices were very cyclical till 2000, due to interest rate changes.  They doubled between 1983 – 1989, for example, and then almost halved by 1993.  In turn, the ratio of prices to average earnings fluctuated between 4x – 6x
  • But interest rates have been relatively low over the past 20 years, and new factors instead drove home prices
  • The second chart shows the impact in terms of first-time buyer affordability and mortgage payments.  Payments were 40% of take-home pay until 1998, but then rose steadily to above 100% during the Subprime Bubble.  After a brief downturn, the Quantitative Easing (QE) bubble then took them back over 100% in 2016

The paradigm shift was driven by policy changes after the 2000 dot-com crash.  As in the USA, the Bank of England decided to support house prices via lower interest rates to avoid a downturn, and then doubled down on the policy after the financial crash – despite the Governor’s warning in 2007 that:

“We knew that we had pushed consumption up to levels that could not possibly be sustained in the medium and longer term. But for the time being if we had not done that the UK economy would have gone into recession… That pushed up house prices and increased household debt. That problem has been a legacy to my successors; they have to sort it out.”

  • The 2000 stock market collapse and subprime’s low interest rates led many to see property as safer than shares.  They created the buy-to-let trend and decided property would instead become their pension pot for the future
  • The 2008 financial crisis, and upheavals in the Middle East, Russia, and parts of the Eurozone led many foreign buyers to join the buying trend, seeing London property as a “safe place” in a more uncertain investment world
  • Asian buyers also flooded in to buy new property “off-plan”.  As I noted in 2015, agents were describing the Nine Elms development as: ” ‘Singapore-on-Thames’. Buying off-plan was the ultimate option play for a lot of the buyers [who are] Asian. You only need to put down 10% and then see how the market goes. A lot of buyers are effectively taking a financial position rather than buying a property”

But now all these factors are unraveling, leaving prices to be set by local supply/demand factors again.  Recent governments have taken away the tax incentives behind buy-to-let, and have raised taxes for foreign buyers.  As the top chart shows, this leave prices looking very exposed:

  • They averaged 4.8x earnings from 1971 – 2000, but have since averaged 8.7x and are currently 11.8x
  • Based on average London earnings of £39.5k, a return to the 4.8x ratio would leave prices at £190k
  • That compares with actual average prices of £468k today

And, of course, there is the issue of exchange rates.  Older house-owners will remember that the Bank of England would regularly have to raise interest rates to protect the value of the pound.  In 1992, they rose to 15% at the height of the ERM crisis.  But policy since then has been entirely in the other direction.

Nobody knows whether what will happen next to the value of the pound.  But if interest rates do become more volatile again, as in 1971-2000, cyclicality might also return to the London housing market.'

 

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sancho panza

https://wolfstreet.com/2018/07/24/cliff-edge-brexit-threatens-34-trillion-of-derivative-contracts-uk-regulator/

'A messy, no-deal Brexit could throw 48 million insurance contracts and £26 trillion ($34 trillion) of derivatives deals into confusion. Nausicaa Delfas, head of international strategy at the Financial Conduct Authority (FCA), told delegates at a CityUK and Bloomberg event that there were “cliff-edge” risks due to uncertainty over the legality of financial contracts extending beyond the planned Brexit date, in March.

LCH, the world’s largest clearing-house, is based in London. It clears over 50% of interest rate swaps across all currencies, functioning as a middle man collecting collateral and standing between derivatives and swaps traders to prevent a default from spiraling out of control. The role of clearing houses like LCH in global finance has become far more entrenched since the 2008 Financial Crisis. London houses are estimated to handle 75% of all euro-denominated derivatives transactions, equivalent to around €930 billion of trades per day, and 97% of those in dollars.

Representatives for the City of London have called for a deal that preserves the status quo as much as possible. But the EU — and in particular, the ECB — seems more interested in wresting a larger share of financial clearing from London, something it’s been trying to accomplish for years.

There’s also a clear commercial incentive at play. Eurex, LCH’s largest continental competitor, based in Frankfurt, announced last year that it would allow banks to share in the profits from clearing. Since then its daily cleared volume in interest rate derivatives has surged from €8 billion to €67 billion — the equivalent of roughly 8% of the global Euro-denominated interest rate derivatives market. '

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Democorruptcy
On 23/07/2018 at 22:00, sancho panza said:

For those unfamilair with Hodges,he's well worth following.His timing can be off and some of his calls miss,but his writing is always logical and well argued.

There's a lot of good analysis but this stands out:if house prices return to previous lows in hosue price/salary multiples,the bottom could be even worse.

  • They averaged 4.8x earnings from 1971 – 2000, but have since averaged 8.7x and are currently 11.8x
  • Based on average London earnings of £39.5k, a return to the 4.8x ratio would leave prices at £190k
  • That compares with actual average prices of £468k today

https://www.icis.com/blogs/chemicals-and-the-economy/2018/07/london-house-prices-slip-as-supply-demand-balances-change/

 

No mention of the increase in joint income mortgages since 1971?

4.8 x 2 = 9.6

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sancho panza
30 minutes ago, Democorruptcy said:

No mention of the increase in joint income mortgages since 1971?

4.8 x 2 = 9.6

We'd need to see the data DM.

If anything I'd say there's been an increase in single households over the last 40 years rather than the opposite.

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Democorruptcy
1 hour ago, sancho panza said:

We'd need to see the data DM.

If anything I'd say there's been an increase in single households over the last 40 years rather than the opposite.

From personal experience I know 1998 was a maximum of 3x Main plus 1x Second. BoE now happy with no more than 15% over 4.5x household.

If there's been an increase in single households, I suspect the majority of them will be renting!

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Nicolas Turgeon
14 hours ago, Democorruptcy said:

From personal experience I know 1998 was a maximum of 3x Main plus 1x Second. BoE now happy with no more than 15% over 4.5x household.

If there's been an increase in single households, I suspect the majority of them will be renting!

Do the lenders realise that with 2 earners on the mortgage the chances of a redundancy occurring under that mortgage have doubled, and therefore twice as likely to be problems paying the monthly than if it was only calculated for one earner?

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sancho panza
21 hours ago, Democorruptcy said:

From personal experience I know 1998 was a maximum of 3x Main plus 1x Second. BoE now happy with no more than 15% over 4.5x household.

If there's been an increase in single households, I suspect the majority of them will be renting!

A good point , you have to consider that if there are roughly 100,000 mortgage approvals per month, and 40,000 are buy to let,any drop off in single buyers is most likely to have been replaced by BTLers

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