Spot analysis: Brexit headache for posh estate agents?

By Chris Smith, 24housing editor. 

Fears over a possible Brexit are hitting high-end property prices. Or are they?

The claim has surfaced as part of the on-going EU referendum debate.

Growth in central London property prices has slowed and consultants McBain Cooper argued the slowdown is linked to uncertainty over the referendum.

The key source was the ONS house prices statistics which registered a fall in February.

But is this the only factor in play and is the drop only temporary?

It’s not the first time this month that premium property prices have come under scrutiny.

Publication of the Panama Papers lifted the lid on the darker side of global finance and increased scrutiny on the UK’s housing market.

Behind this is a prediction that greater scrutiny will lead to ‘hot money’ going elsewhere.

It came as satirical magazine Private Eye revealed leaked data from the soon-to-be-sold Land Registry showing 1.2m acres of land – more than three times the size of Greater London – is now owned by offshore companies.

The value, according to Global Witness, is a whopping £170bn.

There’s a serious issue about money laundering and it’s not just international despots. UK criminals are getting in on the act and using property as their vehicle. It’s an issue we’ve raised before. Government will need to be seen to have acted.

And a possible cooling in the central London property market has implications for affordable housing.

But is this the start of the property bubble bursting?

We’re really looking at the behaviour of what are known as high-net-worth-individuals (HNWIs) who use property as an asset class rather than as their home.

There’s three indicators to look at here:

 

1)    Investor sentiment moving away from luxury property development

As the Evening Standard points out here, there are signs that the City is becoming sceptical about putting funds into developers. They are the ultimate off-plan buyers.

Why? Bankers are becoming endangered species. The surprise story that coincided with the Panama Papers is that City office space rented by major banks is being either sub-let or reduced in size. It’s partly due to cost cutting, a move away from high risk investments and also because of the rise in automated (high-frequency) trading on markets.

That has a double impact: the supply of financiers needing homes reduces and there is an over-supply of new office developments. Under permitted development rules, those offices could be turned into homes.

At the same time there is a pipeline of 50,000 flats worth £1m-plus that are set to be built. A typical year would see around 4,000 of these type of sales. This will add to over-supply.

 

2)    Global trade in the real world

If we look at the real global economy, there are signs of a slowdown caused by China’s managed reduction of growth and linked to this commodity prices are low.

China has been the biggest driver of growth post-financial crisis. But it is slowing its economy down. The first clue about its impact came in shipping company results posted in autumn last year. Maersk Line, the global shipping company, forecast growth for this year being “extremely weak”. The slowdown in real trade will eventually reach consumer spending.

Added to this, Chinese investors are pulling back to home territory – such as the investment fund which pulled out of the Albert Docks development in east London.

Global commodity prices, such as oil and steel, are at historic lows. This means the profits are no longer around in producer countries like the Gulf States.

 

3)    The value of ‘passion assets’

Alternative investments such as fine art, fine wine and top-end classic cars such as rare Ferrari racing cars are a good indication of confidence. They are known as passion assets because they are sought-after by collectors as well as investors.

Fine art. The global market for art and antiques is estimated to have dropped by seven per cent in sales by value during 2015 to $63.8bn from its highest ever sales of $68.2bn.

*TEFAF Art Market Report 2016

Wine. Over recent years, fine wine prices have trended with the Chinese market. The move away from gift giving by the elite and the downturn has seen prices reverse the gains made when taxes were removed in 2008.

Classic cars. The last time there was an asset bubble was in the early 1990s. Fuelled by credit, values of rare sports cars escalated until the recession led to a wave of repossessions. Prices have been increasing since 2008 as investors diversified. A second-hand Ferrari Testarossa could be yours in 2004 for around £30,000 but today prices range from £100,000 to £250,000.

An analysis by the World Wealth report claimed HNWIs now have 10% of their assets in alternative investments and those aged under 40 are borrowing against up to 27% of their assets.

There have been signs at recent high-profile sales that classic car prices are levelling off.

 

So what?

The real risk comes from interest rate rises catching out over-leveraged investors.

The Bank of England has already made a start by warning banks about their lending criteria for buy-to-let investors. The rush to beat the April deadline for stamp duty has led to predictions of a cooling-off. But this market is largely small-time landlords. Not drug barons.

 

Verdict

Brexit or not, it’s clear that the UK housing market has two speculator groups driving price rises. The Panama Papers has helped show how big the overseas group is. The Buy-to-Let market needs a better pensions offering and a greater supply of cheap homes to cut rental income as well as the Bank of England’s pressure before the small operators will exit.

The intrinsic imbalances caused by a growing population and a shortage in supply will still be with us long after the EU vote.

The most recent Halifax report, which is a good barometer of the UK housing market, said: “[Conditions] remain very tight with an acute supply/demand imbalance continuing despite an improvement in the number of properties coming on to the market for sale in recent months.”

“This, together with continuing low interest rates and a healthy labour market, indicate that house price growth is set to remain robust.”

We’ve yet to see clear evidence of a significant cooling in Central London to make a clear judgement, though there’s enough evidence of a temporary pause for breath.

There has been a slowing in the global economy but this puts interest rate rises on hold for a while. And that’s the big trigger.

When interest rates do go up, the question is the impact for ordinary folk, whoever they are these days. Because interest rates affect everyone. If the top of the market drops, how long will it take to filter down, if at all? If trickle down economics makes people rich, will slowly turning the tap off make us poor?

Similar stories by tag

Comments