There’s a Sale of Sorts Going on in London Housing

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Mayfair two bedroom condo, 2,215 square foot unit listed at £5,600,000
Mayfair two-bedroom condo, 2,215-square-foot unit listed at £5,600,000

Being in London last week, I decided to sniff around for you.

The London housing market has been a story of ever-increasing growth for quite some time.  There are several reasons for this.  The sustained growth and enormous bonuses of the financial sector.  The growth of London as a technology hub. The ever-growing ex-pat community, especially from oil exporting countries, and more recently Asia.  And the overall “wealthing” of the local population.

However a few factors have been conspiring to give buyers a slight break.  In the first quarter of 2016 prices in tony areas of London have fallen. In luxurious Knightsbridge, home of Harrods, prices have fallen nearly 7 percent. South Kensington shed nearly 5 percent while other tony areas of the city including Hyde Park, Chelsea, Notting Hill and Belgravia (Upstairs Downstairs location) have all recorded varying drops.

Why?

What’s known as the Brexit (the June vote for the UK to leave the European Union) is creating a wait-and-see attitude from some buyers.  Some have compared the situation to 1992’s withdrawal of the British Pound from the European Exchange Rate Mechanism when prices in Chelsea dropped over 5 percent. Brexit is a temporary benefit to buyers.

Partly tied to Brexit is the weakening of the pound against the US dollar and euro over the past year.  These drops have made UK property slightly cheaper for overseas investors in second homes.  However, going forward this will be temporarily tempered by a new tax on investment property of 3 percent, which went into effect on April 1.  The looming new tax caused a flurry of sales in March as investors sought to beat the tax. This will undoubtedly cause a “hangover” in the coming months that may further fuel declines. After all, were I a buyer today, I’d make the desperate seller “pay” the 3 percent tax to get the deal done in the same manner sellers pay off special assessments in a condo.

But for buyers in March, it was a boon as not only did they avoid the new tax, but anxious sellers were dropping prices over 10 percent (part of the equation of lowered prices in the first quarter).

London will also feel the effects of the Panama Papers leak of Mossack Fonseca with the UK set to crackdown on anonymous property ownership.  Many feel the practice masks money laundering and tax evasion.  Expect a rush for the doors, particularly in luxury residential as the unmasked rats jump off the sinking ship and move on to their next dark corner.

Westminster one-bedroom, 447 square feet £680,000
Westminster one-bedroom, 447 square feet £680,000

Just like Midland and Houston, another hit to housing prices is that those with ties to the petroleum industry have fewer pounds, dollars, and euros to spend. London is home to Shell and BP, and has long been the playground for Middle Eastern money.  Perhaps some, already ensconced in London but financially over-extended, are feeling the pinch to let go of property.

Another reason may resonate with Dallasites … oversupply.  Seems London has also overbuilt precisely the type of expensive new construction townhomes and high-rise flats that are catnip for wealthy second home and investment buyers. Price declines in these projects have led some local buyers to reevaluate them as their premiums evaporate and prices fall into line with existing housing stocks. Let’s compare that to Dallas, where hole-in-the-ground and drawing board projects are raising prices while already built luxury properties languish on the market.

Poplar two-bedroom, 774 square feet, £425,000. Call the Midwife period properties almost all gone.
Poplar two-bedroom, 774 square feet, £425,000. Call the Midwife period properties almost all gone.

How temporary is the dip?

Certainly many of the reasons for this decline appear to be temporary.  Regardless of the results of the Brexit, London is not going to fall off the face of the earth as a world city and financial hub. However all things are cyclical, especially real estate.  While London property has been an Energizer Bunny of double-digit gains for years, the king (well, Duke actually) of London real estate predicts the market is on the edge of a “correction.”  London’s largest landowner, the Duke of Westminster, owner of some 300 acres under Mayfair and Belgravia, is preparing for the fall.  A Bank of England report from December titled the Financial Stability Report claims commercial property located in the western part of London (West End which includes Mayfair and Belgravia and points further west) is overvalued by as much as 30 percent. You can’t have that kind of overvalue in commercial without residential being in the ballpark (or cricket pitch).

Adding fuel to a longer and deeper decline, research firm Real Capital Analytics reports that overseas buyers snapped up a lackluster £10 billion in UK property in the first quarter of 2016, a 46 percent drop from the last quarter of 2015.

Liverpool four bedroom Georgian Townhouse, £695,000 or the price of a Knightsbridge studio
Liverpool four bedroom Georgian Townhouse, £695,000 or the price of a Knightsbridge studio

Outside London?

Outside the London market, the rest of the UK is experiencing selected growth.  Particularly in formerly downtrodden areas like Liverpool and Leeds, the markets are seeing a lot of interest as prices are orders of magnitude lower than London.  For example, a three-bedroom townhome in Liverpool within walking distance to the gentrifying city centre center can be had for £125-130,000.  In London such a property would cost 10 times as much on the outskirts. Posh properties in Liverpool might cost £600,000-ish that would require £3-5 million in London.  If you need to feed your anglophilia on a budget, the UK’s secondary cities may suit.

Eaton Place two-bedroom, 929 square feet for £550,000?? Seeming bargain BUT just 2-years remaining on lease.
Eaton Place two-bedroom, 929 square feet for £550,000?? Seeming bargain BUT just 2-years remaining on lease.

What’s it going to cost, Alfie?

All this sounds like great, albeit temporary, news for buyers. And for those with the deep pockets, it is. How deep?  In central London expect prices to start at £1,000-plus per square foot. If you’re more brave and willing to chance the “up and coming” you can secure a fixer-upper for £600 per square foot. In ritzier areas, easily expect to pay £1,500-plus per foot. As of this writing, one pound equals $1.46 (versus $1.55 a year ago). Over the past year, the pound has fluctuated from $1.39 to $1.58. For reference, the pound hasn’t been this low since early 2009.

In part two, I’ll talk about the specifics of purchasing property in the UK.

Remember: Do you have a secondshelters.com location you’d like to see featured?  I travel quite a bit and enjoy poking around real estate.  Realtors, have clients who’d like to document their second home journey?  Shoot Jon an email. Marriage proposals accepted (they’re legal)! sharewithjon@candysdirt.com