To wonder wtf is happening with the London property market?!

[MeAndMine21]

Unbelievable. It's never been this bad.

Will it just keep going up?

My degree in economics is coming back to me. It's been a long time though!

The I t can't go on croud have been saying it for about 10 years.

It should if crashed in 2007, instead they printed money, brought in close to 0 % interest rates both for the first time in the 300 years boe history, bailed out the banks and kept inventing more schemes and gimmicks to prop up the housing market.

They must be running out of ideas to keep proping it up.

Oh you can certainly lose money by buying in London at the wrong time, I'm not denying that. But to really lose money, you'd have to sell at the wrong time too.

Usually the worst people on economics are economists. None of them saw the crash last time coming, plenty of unqualified plebs did though.

A lot of economists saw the last crash coming! Krugman for one, but many other people involved in finance who aren't economists laughed at them.

But does the crash actually matter? Most people keep owning, keep paying the mortgage - we have always wanted through all the crashes as did my parents during the 70s property crash and then prices in cities where there are jobs tend to go back to where they were before.

There has been no era in recent times where London house prices crashed and have stayed below the prices after the crash. Now we might over very long periods have such changes eg my relatives moved to the NE in the 1880s for jobs (in mines) as that was where the work was - the true Northern power house. I imagine London was doing pretty well then too. That might happen again a bit like the Irish always seem to have to leave Ireland during crashes in order to get jobs.

A handful did, not quite sure its lots.

No you're right DeoGratias a short term crash doesn't matter at all if you can keep up your payments and have no need to sell. We bought in the 90s dip and never sold. If there's another dip, we will buy again but not sell. Over the long term, property has performed very well for us.

longtime you are overlooking the fact that in large complex markets prices are set at the margins. You don't need large amounts of boomers to die all at the same time: you just need very slightly more of them trying to sell into a market than there are buyers for prices to fall. This is true for the demographics as well as for the way price falls work in highly illiquid markets.

The reason it hasn't all come crashing down is nothing to do with population numbers. It's because monetary policy has pushed interest rates down to historic lows, thus allowing banks still to pretend that the credit they are extending is affordable.

Let me give you an example: housing prices are determined by the projection of someone's future income (income multiple) plus interest rates (current and projected). Wages aren't increasing in real terms, but lenders have been continuing to extend more and more credit because interest rates are so low. There is, however, even at close to zero interest rates, a limit on how many income multiples a lender will be willing to extend. If interest rates are already so close to zero, how can lenders keep supporting price rises except for allowing more and more income multiples to be advanced? But there comes a point where interest rates obviously can't get any lower to make the cost of credit any cheaper (unless we have negative interest rates....) So when salaries are stagnating, where is the projected future income going to come from?

Lots of those who would like to buy and who would buy in a normal market are completely priced out, and have been replaced by buy to let landlords. That's a very different kind of "demand" to owner-occupation. Again - demand is not the same as desire: lots of young people desire to buy, but that doesn't mean that there is demand to buy at current prices if they cannot afford it and can't get credit to buy at that price point. If the buy to let "demand" evaporates for whatever reason, it isn't elastic and can't just be replaced by potential owner-occupiers.

I'm afraid too that you are very wrong about the impact of the demographic boomer bulge on pensions and healthcare. Already pensions are by far the largest spend in welfare terms. When the state pension was first envisaged there were 4-6 workers for every pensioner - each paying a level of tax that would support what was envisaged to be a pension of around 10-ish years at the end of life. Now the number of workers per pensioner has dramatically decreased - it will soon be at 2 workers for every pensioner - and the projected time of claiming a pension can be up to 30 years. The only way the current pensions burden would be sustainable is if younger workers were experiencing rapidly rising salaries in real terms and were also able to pay a vastly increased percentage of tax. Not likely at a time when those younger workers are not only experiencing declining real earnings but also can't themselves pay for housing.....?

The impact of health and social care for the older generations is only just starting. I assume you don't have an elderly relative in a care home? Because if you did you would know that any property they own becomes subject to an order to sell in order to pay the care home fees, and either a charge is run up against that property until it sells, or the fees are paid from the proceeds until they drop to a low level (around 22k). The pensioners and boomers who need care - and the ballooning in diseases like severe diabetes and dementia has only just started - will be forced to sell their houses to pay for it until the proceeds are all used up and they won't get a choice about it. This effect will only gather pace over the next 15-20 years and remember, asset price markets are set at the margins.

Tod is totally right. Wish ibcouod articulate that so well. Great post

The effect over 15-20 years will not help the people needing to buy right now. It will make it better for our kids though. I think a whole generation will lose out before things improve.

I really think the only people who will end up actually living anywhere near London will be the front line workers and min wage.
The middle classes are being forced out and I believe gov will house workers in high rise apartments and charge a fair rent.
Those who don't have to live there will have to pay through the nose, or commute.

Deo it's contradictory to say that properties over £1m are not rushing off the shelves but demand remains high. If they're not rushing off the shelves then demand is not at all high!

People tend to derive an idea of basic supply and demand from relatively closed microeconomic systems in which demand and supply are thought of as purely numerical. (They aren't ever exactly numerical, but the classic ways of explaining supply and demand in say, GCSE business studies, assume they are.) But that idea of supply and demand - if Tom makes X widgets and sells them at y price to z number of customers - is a kind of economic fiction: it's completely inadequate in understanding how large macro markets work. It's a bit like having done GCSE science and then insisting you can understand quantum mechanics via the plum pudding model of the atom.

"Demand" in housing terms is a function of lots of factors - incomes, interest rates, inflation, projected monetary policy, tax rates, international capital flows, politics, the operations of derivatives and credit risk instruments. The housing bubble was a result of lenders suddenly being willing to extend much more credit than before in new kinds of products. Why did creditors suddenly lend so much more money when salaries weren't rising at the same rates as housing? Because they had invented new credit derivatives which they thought removed lots of the lending risk (only they hadn't). In other countries their housing markets crashed after the credit crunch partly because their governments let it happen. In the UK - and especially in London - the government and the banks made extraordinary efforts to prop up the market - which have only succeeded in blowing the bubble bigger. But what Tory government wants a housing bubble to pop on its watch? ALL our economic policy since 2008 and especially since 2010 has been geared to stopping that from happening and miraculously they pulled it off. But they can't pull it off for ever, because the underlying economic fundamentals are totally at odds with the bubble.

whatthefox but that is exactly right - except until now most people haven't had to sell in a declining market, but have been able to hold on until prices rose again.

However some people will always have to sell, and you only need a significant increase in those people for a market to start dropping. Auntie Doris who's racking up 800 pound per week fees in a care home can't afford to sit it out and wait: the local authority will force a sale of her house and if it gets a lower price than she or her children expected then tough, they don't get to wait until the market picks up again. Or take Nigel and Carol, baby boomers who have remortgaged their detached 5-bed house to "invest" in some buy to lets during the boom era, but suddenly find their pensions are a lot less than they thought and they are going to have to downsize ASAP in order to repair their finances, as their debt is spiralling out of control. They may not get to choose to sit and wait either. (And what 35-year-old is going to afford that 5-bed family house when they haven't yet managed to buy a 2-bed flat?)

Up until now those situations haven't been widespread enough to affect the market, but when the demographics really tip over (c.2020-2025 IIRC), and the impact of the massive increase in chronic geriatric disease, dementia and cancer starts to make itself felt, it will start to put all the postwar asset inflation slowly into reverse. Bear in mind too that the asset-rich generations are currently the major voting bloc in the UK. But what happens to economic policies that are designed to prop up their wealth when the power shifts to a younger voting bloc? In what year will there be more voters who don't own property than those who do, and what happens then? Are future generations going to vote to pay higher taxes to preserve the property investments of older people at their own expense?

As for London, it might defy the wider UK market because of people parking capital from overseas there, but eventually some crisis or other will happen in the financial sector and that will have an impact there.

ToddlerWrangling and talkinpeace are talkinsense. We currently have ZIRP and will probably have NIRP if Andy Haldane has his way. The BoE talks about raising rates but they know if they do their Ponzi schemes collapse. The housing and stock markets both rely on virtually free money, and if that disappears so do their markets.

ToddlerWrangling
You are still working on the assumption that incomes and borrowing have anything to do with the London housing market.
They don't.
Places like Battersea power station are being bought cash by people parking their savings
many of the properties will never be lived in (maybe not even visited) by their buyers

So long as the UK is politically stable and has stupidly low property taxes the top end property market will be surreal
and thus impact on the rest of us.

I love the HousePriceCrash website - I was banned from it a long time ago
but I cannot see how there will be a crtash in UK prices - because unlike the Ireland, Spain, China, we have a shortage of supply
and unlike the USA we do not have non recourse mortgages

I have clients still paying off their negative equity from the 1991 crash

toddler.. you don't need lots of baby boomers to die or downsize in order to effect the market you are right, but you need enough of them to do so at the same time, enough to create enough of a surplus in order to force prices down. Now the scenario which you are describing takes place of 10-20 years which means that there must enough continuous supply across this time in order to permanently lower prices, which I don't think will occur.

You are correct about the assets being sold in order to fund care homes, but in the current era people stay in their own homes for far longer than they used to, which means that supply will still be lower than demand.

Defining demand, as you have, you have identified a very good point, people being willing and able to pay ( what actually is called effective demand), there appear to be a larger number of peple who are willing and able to pay at certain levels than there is supply at that level, which keeps prices high

Your rather mean spirited remark about using GCSE business studies and over simplifcation is rather erroneous to be honest. The housing market, which is a micro market, is down to supply and demand.

I think your predictions are based on a number of determinents all acting in the same way on the market at a similar time.

But who would it benefit even if it did?

A large house price fall would have to be caused by some sort of economic shock, so lets say that occurs and house prices in London fall by 20 %.

That means that the £500,000 flats along the road from me would now be worth £400,000 still out of the price range of many. But this would have a rather large economic impact. The number of people in negative equity would grow, which means that two things will happen, people will either sit tight where they are and hope for a future increase, only those who have to move will do so. Also the number of reposessions and bankruptcies would increase, now this has a rather large macro economic effect.

First, consumer confidence will fall, consumption (65% of AD) will reduce, the effect on investment will be the same and this will reduce too. A mass recession ensues, unemployment rises, and many of your people who are looking to buy a house now will unable to do so, keeping them in rental property.

Oh and the demand for rental property increasing means that rents go up...

Finally because there are so many reposessions, and the banks have been forced to write off so much money from their balance sheets where the asset is not worth the money paid, banks will be far more cautious with mortgages. The level of deposit needed will increase and multiples of salarly allowed will be lower, effectively meaning that many people are still priced out of the market.

So who benefits? The cash rich are one stakeholder that benefits here, secondly foreign buyers ( who are cash rich) are more likely to invest in London property even if their own economy has been effected because it would still be seen as a good investment.

What will also occur at this point is the number of people coming to London to find work will increase due to the economic shock meaning the demand for housing rises and as a result the house price fall is likely to be short term, rather than a long term readjustment as eventually prices will begin to rise.

Your predictions may be correct, but I think that you are looking for reasons that the market will crash, and are hoping for a set of circumstances to happen together to cause this. For it to happen in a way that there is a long term readustment to prices in London would be catastrophic for the economy, and it would benefit no one.

Oh and there may be a coming crisis in pensions, but your analysis is flawed in some ways.

The modern baby boom pensioner is far more likely than previous generations to have a private pension which means that many of them are likely to continue to pay tax which was not the case in the past. This means that the tax take will probably not fall at the same level as it would if they were all retiring and living off the state pension.

The private pension level, and the number of boomers with assets to liquidate will also lower the liability on the state, they will pay for more of their care than their parents generation.

In any case only 25% of the entire tax take is from income tax, 50 someting percent of it comes from indirect taxation, which boomers will still continue to pay.

I can forsee the situation that things like heating allowance, free bus passes etc either being cut, or being means tested to reduce spending, and as you know across the next 20 years the pensionable age is set to rise anyway, which again reduces some numbers and the size of the bill.

Also the population growth through net migration will reduce some of the liabillity on the British worker of such things.
The basic population elements of the London issue will cause house prices, if not to rise, to remain where they are.

You can say a lot about me, but I do know my economics...

Pensions are an interesting case because as the DB pension generation age and the DC workers hit retirement age and discover that they have no money, they will carry on working ....

I can't compete on the economics bi
It I think the extremely high cost of residential and commercial property will start to encourage businesses to look at cheaper locations ( lower overheads and wages) than London. ALongside individuals and families choosing to move away. It is certainly true for us. We couldn't move back and have the same quality of life we have now. Interestingly when I explained this to a senior director at a
Housing developer, he looked rather shocked. But not as shocked as I was when he told me the prices they were charging for 2 bed new builds.

dithery
Commercial property in central London is currently under valued against potential returns from the users of the space (I have a VERY well placed source)

"Deo it's contradictory to say that properties over £1m are not rushing off the shelves but demand remains high. If they're not rushing off the shelves then demand is not at all high! "

Demand is most high for homes in the £200k - £600k range. Most people can't afford £1m+. The massive increase in stamp duty rates at the upper end of the property market (which have by the way as ever with tax rises resulted in a huge DROP in tax revenue 17% fall in stamp duty receipts) has cooled the upper end. It has not cooled the bottom end.in fact stamp duty rates at the bottom end are lower than when my daughters bought in 2012/13.

Most people are in care homes for about 2 - 4 years before they die. The changes in inheritance tax mean people will be incentivised to stay in their family houses when old rather than sell them particularly outside London and high stamp duty rates mean people like I am whose children might leave home won't even swap our family yhouse for a flat because we'd have to give the state a small fortune (about £300k in my house) even just for a straight swap of same priced flat for house. So lots and lots of interference in the free market in relation to housing as ever.

My London borough has the highest number of inhabitants since records began in 1901. There are no empty flats bought by foreigners. There are lots of houses and flats bursting to the seams often with 3 generations under one roof. There are also more "beds in sheds" in gardens than anywhere in London too.

Here is a depressing statistic that I read in a book I found randomly in a university library about ten years ago:

UK, 1915.
Owner-occupied houses, approx 8%.
Privately rented houses, approx 90%
Public housing, approx 2%.

Back then it was impossible for the vast majority of people to purchase their own housing. There was little provision for social housing. That had only begun about 20 years before, and councils were still working out how to target it most effectively. There was a lot of debate about the deserving versus the undeserving poor, a point I shall return to.

I am no economist, but it seems we are returning to this situation. After WW1, provision of social housing began to increase. Councils obtained the power to obliged private landlords to sell at mandatory prices. Death duties forced other landlords to sell. After 1945 social housing increased so fast that (if I recollect correctly) it made the absolute majority of housing in cities like Glasgow. Plus banks were restrained as to the amount they could lend, and private rents were limited by statute. All this made landlordism unprofitable. In other words, houses were cheaper to buy because they were not good income-earning assets, and there was not much money sloshing around to buy them.

Now, rent controls have been relaxed, lending criteria have been relaxed and social housing has been decimated. It is hardly surprising that house prices have outstrippped inflation generally since the 1970s. If matters are left, we will return to the situation in 1915.

Now, about London. Precisely the same thing is happening across many other cities across the developed world. In the last 15 years. Take Australasia: prices in Sydney, Melbourne, Auckland and Perth have outstripped everywhere else. Same in China etc. It is a mixture of stagnating regions and people moving to the big cities for work, and investors looking for somewhere safe to park their savings: unlike shares, houses do not vanish in a puff of numbers.

What is happening now is that people who own properties in these places are using their equity to buy property in the regions. My house (NZ provincial city) has appreciated in value by about 30% in the last 12 months or less. I expect the same will happen in the UK.

The harsh truth is that London's property / mean income ratio is actually better than a good many other places. the last time I checked the figures I worked out that it would be more financially feasable for me to move to London than down the road to Auckland.

This is a global phenomenon and it could easily get worse.

Western societies are regaining the characteristics of societies in Victorian times. One obvious example: there is a lot more talk about dole scroungers than there used to be. This is absolutely reminiscent of the Victorian division between the deserving and the undeserving poor. I remember when I was growing up in the 80s and early 90s, people were much happier to assume people in financial straits needed help, not condemnation: we were more suspicious of people with lots of money, not those with none. We also have Gvts across various countries outsourcing their social role to private profit-making organisations. This is the same as Victorian times again, except its worse because the (non-profit making) Church has much less of a role.

I think Deo has the situation summed up perfectly.

We are currently looking at London properties and various agents have said that they are struggling to sell those over £1m but that those below are still 'flying off the shelves', so the market is sort of regulating itself. Of course it's supply and demand to an extent, but obviously people can only afford what they can afford and my impression is that residential mortgages are not that easy to obtain, now they are 'stress tested' (BTL may be different).

However, the cost of paying a mortgage at current rates is much lower than paying rent for the equivalent property, so it's still sensible to buy if you can, in my opinion.

Also, as late BBs we are doing the same as a lot of our contemporaries, which is to sell the large family home in 'commuterville', and buy a flat in London and a property further out. We are not waiting for the Grim Reaper and/or HMRC and/or the local council, before planning ahead.

We want to buy a flat in London to be near to DH's family, for the DC to use, and for us to use for enjoying all that London has to offer in retirement. We also have it in mind to rent it out from time to time to supplement our pensions and maybe use the income to rent somewhere for say 6 months abroad or elsewhere in the UK, to explore different areas. We see London as a sound long term investment, although there may be dips in the road. We will pay cash and maybe dip into pensions if necessary to fund the purchase.

So I wouldn't rely too much on the demise of the BBs to help the market to crash in some way, for those of you who are obviously hoping for this.

'It is all about supply and demand.'

And much of that demand is from people who do not live and have no intention of ever living in London.

This is what needs to be fixed.

How can you 'fix' a free market economy?

Although I agree that all possible should be done to keep out 'dirty money' but that's a different issues.