The Deutsche Bank has been quite vocal on predictions on the future of London’s busy property market in coming years.
In the bank’s sixth “Konzepts” paper, Sahil Mahtani argues that a combination of rising interest rates, the Bank of England’s tinkering with the market, and the increasing “politicisation of the housing issue” means London’s insane price rises can’t continue — and price falls could be likely.
“multiple catalysts to suggest that 2015 is the turning point”
Some facts to consider
Mahtani begins by illustrating just how spectacular the rally in London property prices has been over the last few years, with some stunning facts:
- Every £1 invested in London property in 1990 is now worth £5, double the performance of the FTSE 100.
- In the last sixty years, London house prices have only fallen 3 times: during the Volcker recession of the early-1980s; the sterling crisis of 1992; and the 2009 financial crash.
- Conservative estimates put average London house prices at 13 times average gross incomes.
- London residential mortgage debt amounts to a quarter of the country’s total.
The London property market has always been hot, and if your a regular reader of our posts you will know this is an area that we are moving into. The original article correctly points out that London finds itself in the position it is in because supply simply keep up with the demand, year on year more and more people move/relocate to the capital to live on a permanent basis.
There seems to be a lot of confusion around at the minute as we regularly see news surfacing surrounding the Housing marker in the UK, one day we are told that Mortgage approvals are on the increase, yet there is a housing crisis that grows year on year.
There is it seems a belief with investors/landlords looking to buy in London that regardless of what you pay for a property there that the value will always increase and a good return can be achieved, this we must assume is because of some of the facts that we mentioned earlier ion this post.
Things to come
If you’re a would-be buyer, all this is great news. But for people who have recently bought it’s another story.
As in Hong Kong, Mahtani thinks that even if policy intervention is only meant to put a lid on things, it could end up sending prices into reverse.
He says: “Again, all that needs to happen is for investors to think price outcomes are asymmetric, with low upside and large downside.” In this way a self-fulfilling cycle in the opposite price direction could emerge.
Homeowners would then find themselves in negative equity, freezing much of the market as people sit on their property until the price gets above water again.
Another issue is interest-only mortgages. Mahtani writes: “Over a third of those with mortgages have interest-only loans, with the first sizeable wave of principal repayments due in 2017-2018.” That could lead to a wave of repossessed homes, again driving prices down.
Mahtani says that ultimately it’s “a losing battle to call an end to the froth in this market. But perhaps we are close to the turning point.”
In short, either prepare for more afforadability or brace for impact because London’s property market is heading for a big shake-up, according to Deutsche Bank.