Brexit – Is This The End For Prime London Property?

Well 2016 was a lively year. Stock markets had moments of extreme volatility, property taxes increased yet further with the introduction of an additional 3% SDLT for second homes/investments and, of course, we have had the Brexit vote. This is the perfect storm that many had been predicting for London property prices.

Indeed the press have been gleefully wishing for the rich to finally get what’s coming to them. I could go on a rant about the cretinous attacks on the rich by not only the media but politicians – it appears that the rich are somehow all evil (unless they won the lottery), their advisors – are all complicit in money-laundering and the perfectly legal use of offshore structures is somehow seen as illegal or immoral.

However, as the rant would be longer than War & Peace, I won’t.

Nevertheless, it is important to keep in mind the political and media agenda behind what is reported. You must distinguish between worthless opinions and the facts. I will return to this topic later.

So what has actually happened to house prices in Prime Central London (PCL)?

Well it varies massively from area to area, budget to budget and several other factors. Depending on who you believe prices are down 10% or even 20% but to be honest these figures are massively misleading. Yes at the top end in Knightsbridge if you had to sell now then you might take a 20% hit compared to the absolute peak of the market.

But the fact is that transactions have plummeted much further than prices. Many agents I have spoken to have said that their figures were down 40% on 2015. Indeed transaction levels were dramatically skewed by the additional SDLT on second homes/investments which came into effect on 1st April.

For example, in Kensington & Chelsea transaction numbers fell 88% from March to April while even the lowest fall in Yorkshire was still 40%, which just goes to show the unintended consequences/stupidity of many government actions.

Early last year, I was advising clients not to buy for the sake of avoiding an additional 3% SDLT. Quite frankly people were buying poor and average properties rather than focusing on high quality properties that will vastly outperform over the long term and make the 3% look insignificant.

And, trust me, there wasn’t suddenly a glut of high quality properties available. It was also very obvious that prices would drop straight after the date so there was no need to rush.

Anyway, the fact is that the price falls seem worse than they are because they are happening on fewer transactions. But what the press don’t report is that most sellers are simply not listing their properties or will not sell until they achieve a reasonable price in their eyes.

For example, I recently looked at a house for £20m which is about to come to the market. The agent asked what I thought it was worth – I said £12.5m….

Likewise, there are several houses available in Belgravia which are on for record asking prices and the owners have rejected offers within 12% of the price.

I could show you countless other examples. Most of the people who sold in the immediate panic after Brexit and earlier in the year were international owners who were and still are receiving inaccurate information through the press and have made poorly informed judgements.

Because the media focusses on worst case scenarios and also tend to get the facts completely wrong. For example, here are some quotes from the press from 2000 – 2005.

2000 – “Housing-market experts, from estate agents on the ground to analysts in the high-rise city banks, are agreed on one thing: this is more than the annual summer slowdown. House-price inflation has dropped considerably and, in some pockets of the capital - usually areas on the fringes of more fashionable addresses - where people were paying silly prices for bad houses, properties are indeed worth up to 10 to 15 per cent less than they were six months ago.” The Daily Telegraph

2001 – “The house price indices are for once agreed: prices are slipping as the effects of recession take hold. Suddenly, the telephone-number price-tags of rather ordinary two-bedroom flats are beginning to look ridiculous.” The Daily Telegraph

2002 – “The top of the property market has been in trouble for some time… Property in some outer London boroughs now changes hands at phenomenal multiples of average local earnings - the prices being pushed up by a relatively small number of people driven out of expensive parts of the city.

In Bromley, for example, house prices are now 10.4 times local earnings” The Daily Telegraph

2003 – “He [Roger Bootle] said: 'The message is clear. Houses are now so over-valued that a prolonged period of falling prices is on the cards.' … Some London 'hot spots' have already seen prices marked down in recent weeks, which has been attributed to lower City bonuses and Stock Market uncertainties.” The Daily Mail 1st March 2003

2005 – “After five years of unstoppable price rises, the housing market has been showing signs of jitters.” BBC

Which just goes to show that you cannot and must not rely on or be influenced by commentary in the press.

As you can see they were talking complete rubbish. House prices soared right through until 2007. Even the “experts” they quote do not know what they are doing:

Roger Bootle who was one of the Bank of England’s wise men and formerly chief economist at HSBC got it completely wrong. In 2003 he said that “Prices could fall up to 35% in the next four years”.

If you had followed his advice and sold in 2003, you would have missed out on four years of some of the largest house price gains this country has ever seen. Yet he was someone we were all supposed to listen to as he had access to better data than anyone else (being one of the Bank of England’s “wise men”) and he had a better understanding of economics.

The problem is that almost no-one who comments in the press has studied the history of the property market which is why the length of the trends confound them as do the sudden reversals.

You just can’t rely on what anyone says in the press. But you can understand why people abroad panic.

To give you an idea of how misleading the media lens can be think of the “riots” in London in 2011. They lasted a few hours and were very isolated. But the press abroad painted it as if London was burning down. We made some good acquisitions then because owners in Asia, etc. were selling out in a panic.

But it happens here too. Think of Sars/Bird Flu in 2005. For two weeks it was pretty much all the press covered. There wasn’t enough Tamiflu and people were actually buying Hazchem suits because it was going to wipe out Europe. Meanwhile, people in Singapore, the alleged epicentre of the pandemic were happily going about their lives as normal.

As the old adage goes – never let the facts get in the way of a good story.

So in all the media hubbub of Brexit, Cameron’s resignation, Labour’s implosion and the stock market gyrations, the point that everyone seemed to have missed was that it was not 2008.

There were very few forced sellers and the world was, and still is, awash with money. For example, Aberdeen Asset Management was forced to sell its Oxford Street property due to small investors panicking.

They did so within two weeks at a 15% discount. Not a great bit of business but nothing like 2008/9 where liquidity had disappeared completely and they would have been lucky to have sold it at a 40% discount.

It is important to note that we are still climbing a wall of worry. In 2007/2008 the view was that prices could only go up. Sealed bids were the norm and prices were going up 25% per annum. The mood was that of pure hubris - It was different this time!

We simply have not seen anything like that this time round. The scars of 2008 are still raw so people have been talking down the market for years. Just as they did in 1998.

But it is impossible for a market to crash when there is so much money on the side lines – correct yes, but crash, no. And that is what we are seeing: a normally functioning market correcting.

In fact the falls have been a good thing because they have been a reflection of higher SDLT combined with uncertainty over a general election, referendum and a huge number of tax changes, e.g. reduction and eradication of mortgage interest rate relief and non-dom legislation.

I.e. the market has been behaving rationally. Indeed if the market hadn’t corrected then I would be worried about a crash because we would have seen the irrational exuberance of 2006-2007.

But in recent years the mood couldn’t have been more different: everyone has been saying that prices are too high and various city analysts have said that residential prices could fall by up to as much as 35%. They are basing these figures on the house price to earnings ratio which they see as the lead indicator.

UBS produced a note in November 2015 which said that house prices would crash by up to 35% because the house price to earnings ratio was above 10 and the market in the past had crashed when the ratio has gone above ten. This is true to a degree.

EXCEPT, there are far, far more examples of the market ignoring a house price to earnings ratio above 10 with prices going much higher. This is true not only in the UK but also the USA and Australia.

For example, see the quote above from the article in 2002. House prices were over 10 times earnings then, but house prices didn’t crash or just tread water, they increased massively for five years.

Now what I am about to say is hugely unpopular with the mainstream but then the truth often is:

The fact that most people up to the age of 37 cannot afford to buy property or that the house price to earnings ratio is high is irrelevant for house prices, especially in London. It simply doesn’t matter…

… Is it unfair? Yes but:

THIS IS TOTALLY IRRELEVANT FOR PRIME LONDON PROPERTY PRICES RIGHT NOW

Why? Well just because first time buyers don’t have the means to jump on the housing ladder doesn’t mean that the money has disappeared into a vacuum or isn’t being produced. The money to buy property is there it is simply coming from a different source.

Indeed earning money is dreadfully 20th century. Why earn it when you can simply print the stuff!? The major effect of QE has been to boost asset prices. Those with a lifetime of savings and assets have made out like bandits. Indeed I thought that QE has stopped but it appears that negative interest rates, helicopter money, the people’s dividend seem to be becoming more of a reality every day.

Meanwhile the young are struggling. Indeed in prime central London you can have an excellent career as a lawyer, banker or stockbroker and still be completely inadequately funded in terms of buying a house.

Unless of course you have the best bank in the world.

The bank of mum and dad are now the middle men between the central banks and the younger generations.

The over 55’s have huge disposable wealth and are the richest generation in the history of mankind. There is also now greater flexibility on how they can use the billions of pounds stored in the UK pension pot not to mention the impending changes to IHT thresholds which will allow them to pass down more of their wealth.

A large percentage of this money will now enter the property market – this is likely to affect the lower end of the market more than prime central London so expect to see first time buyers priced out of even fringe areas. Don’t worry, they will not be homeless, they will simply move further afield as has always happened in the past.

Let me give you a couple of examples:

1. When my best friend’s father moved to London in 1950 he had a place in Pont Street, Knightsbridge. When he visited his grandmother in Mayfair and told her where he was living she retorted “Why on earth are you living so far out?”

2. In 1989 I rented my first flat in London in Notting Hill. It transpired that nearly every other house was a “crack house”. Yes a slight exaggeration but also closer to the truth than many realise. Shepherd’s Bush, Shoreditch, Queen’s Park, Brixton were absolute “no go” areas. In 1989 taxis did not go south of the river. Northcote Road, the epicentre of what is now called “Nappy Valley”, was where you went on a Saturday night to get stabbed

No-one in 1989 would have believed that these areas would have become thriving hubs. It is rather derogatorily referred to as “Gentrification” in the press. Actually it is the sign of a healthy city that is thriving and evolving.

It is also not a new phenomenon as many would have you believe. Otherwise we would still be living inside London Wall.

But money from the older generations isn’t the only source of wealth replacing first time buyers: international wealth is now more fluid than ever before.

This is creating a completely different world; a world in which a few “global super cities” are attracting a disproportionate amount of investment in terms of infrastructure. London is obviously one of these and this is unlikely to change despite the various scare stories on Brexit.

Those who own property are the biggest beneficiaries of these infrastructure improvements. Crossrail is an obvious example. Those who own property near a Crossrail station have seen huge house price growth through no skill of their own.

They benefit from taxpayer funded improvements whereas the taxpayer in Yorkshire, Cornwall, Sussex, etc. receives no financial benefit.

But then this has always been true: those who own the land always take home (excuse the pun) the largest share of increased economic activity and profits.

This is one of the many reasons why, historically, house prices have increased at substantial multiples to earnings’ increases.

So London will continue to expand as more money is attracted to it.

The influx of capital will lead to infrastructure improvements which in turn will feed into land prices. For example, Crossrail will mean that towns like Slough will effectively become part of London. In 20 years’ time it will be the equivalent of Acton today, just as Acton today (demographically) is the Notting Hill of 30 years ago.

Then there will be Crossrail 2, an additional runway - wherever that may be – and further infrastructure improvements throughout the UK as May has already said that Osborn’s “northern powerhouse” is too limited.

So there will be huge infrastructure improvements as there normally are at this stage of the cycle. And don’t worry about Brexit; because, if they cannot attract investment from abroad (which is highly unlikely), they will simply print the cash!

When you truly understand the implications of this you can acquire property astutely. This is why prime central London seems so expensive but isn’t – it benefits from global infrastructure improvements just as New York and Hong Kong do. Looking at local trends is simply the wrong way to judge prices.

What else will drive property prices?

You have to remember the government has a vested interest in higher house prices despite what they say, because it it is virtually impossible for a government to be re-elected when house prices are falling. This is why they come up with idiotic schemes like right to buy, help to buy, help to buy ISA’s, etc.

These are designed to help first time buyers but actually just boost house prices.

Meanwhile the margin that banks make on property lending is huge and they will want to be able to lend more and more. In America they have already relaxed the rules on who can and cannot borrow by changing how credit ratings are calculated.

It is a racing certainty that the laws on lending in the UK will be relaxed too. Indeed the first sign of this was the effective dismissal of Martin Wheatley, the Chief Executive of the Financial Conduct Authority. Apparently he was regarded as being “too harsh on the banks”.

But the way credit rules will be relaxed will be different from the last cycle – at least to begin with. For example, The Times recently was proudly announcing a victory in the battle against ageism as they push for mortgages to be granted to those over 60.

This is happening so the over 60’s can now get 25 year mortgages as they are living longer, working to an older age and have considerable assets. This allows more money into the market which has to lead to higher house prices.

More importantly, the obvious extension of this will be for banks to start offering 50 year mortgages to those aged 25-35 which they already have in Japan and the US (in Japan they also have mortgages which you can pass to the next generation). This can only drive house prices higher.

Tax changes will drive the market higher

As is often the case the important facts are not always so obvious. The Budgets over the last 18 months have been viewed by most commentators as being distinctly negative for London property. However, the most important announcement for London and UK property prices did not appear in the housing section of the budget.

No, the key point was the news that corporation tax will be reduced to 17% - the lowest rate in Western Europe with the exception of Ireland. This was announced before Brexit was even regarded as a possibility and will encourage a vast amount of investment.

Indeed Macdonalds announced after the Brexit vote that it was moving its international HQ to London. Meanwhile BP, Apple, Facebook and google are all investing heavily in London - which can only have an upward effect on land prices which in turn will feed into higher house prices.

This inflow of money will dwarf any outflows caused by the changes to the non-domicile legislation and the reduction in mortgage interest tax relief for buy to let investors.

In fact fears over non-doms leaving London are unfounded. A small number will certainly leave, but for many the tax breaks were the icing on the cake. They choose to live in London because it is a fantastic city.

If you don’t believe me, think of all the hedge funds that were going to flee London for Switzerland. Almost all of them returned because life is too short to be that bored especially when you are that rich. Indeed London is still a wonderful tax haven for new non-doms, so those leaving will simply be replaced by a new influx.

Meanwhile, the economy is already outperforming the rest of Europe and if you have tried to buy or even rent office space in London you will know that prices are rising rapidly because competition is fierce. As one overseas’ client recently said to me “I walk around London and there is no sign of a downturn”.

Indeed it has been mooted that Corporation tax will be dropped to 15% and even lower. The government is actively trying to attract business. So when you read newspaper articles about how EU nationals will be thrown out of the country or not allowed to work here remember these in reality are no more than scare stories or opinion pieces.

The government is acutely aware that we need skilled workers and that we need to continue to attract the best talent in the world.

But what about Brexit, I hear you cry. You’re dodging the subject.

So the Referendum debate descended into farce: on one side the Remain camp said that the UK would collapse and that an austerity budget would be inevitable, i.e. they would punish all of us for our stupidity if we decided to leave.

On the other side, the Leave campaigners warned of millions of Turkish immigrants swamping our shores in an invasion that would have embarrassed the Saxons, Vikings, Danes and Romans combined… Of course, if we voted out then they would be able to give £350m per week to the NHS.

Amazingly an austerity budget was decided to be a distinctly bad idea by the very people who proposed it and that actually a bit more cheap money for the economy was exactly what was required. Meanwhile, the Brexiteers claimed that they had never promised to give £350m to the NHS despite video evidence to the contrary…

But, hey, all’s fair in love and politics and politicians think that if they are to galvanise voters they need to shock them into action. Hence the catastrophic scenarios that were laid before us and the continued pessimism that dominates press coverage (there are some optimistic voices but they are being drowned out by the “bad news brigade”).

Now I am not saying that the Brexit vote is good or bad. However, there are an extraordinary number of people who seem to be certain about the outcome and who paint an incredibly dim future for London and the UK.

These predominantly focus on the loss of passporting rights, a brain drain and the general eviction of the UK from world trade. This will result in a collapse in the economy, house prices crashing and a return to the 1970’s when the UK was the “sick man of Europe”.

Now, this cannot be ruled out. However, is it the only outcome and is it even a likely outcome? And just because the entire premise of the Referendum was idiotically simplistic – decide whether you want to vote in or out – rather than looking at a range of possibilities, it doesn’t mean that the “split” has to have a binary outcome which is good for one side but bad for the other – why can’t it benefit the whole of Europe?

Indeed I find it hard to see how one side can “win” while the other “loses”. If it is bad for the UK it will be bad for Europe and if it is good for the UK it will also be good for Europe.

And we are not that far removed from European opinion. After all immigration is actually far more of an issue for Germany, France, Italy, etc. than it is for the UK; a fact that has not been lost on populist politicians in these countries.

So is it not possible that the right of free movement may be restricted to certain types of people, based on skill levels, place of birth, length of time within the EU, etc. to placate the voters? And would this then open the doors for an amicable agreement with the UK?

If we lose the passporting rights will every banker leave London? I know several who are already preparing to keep their family in London and commute to mainland Europe should the worst case scenario unfold.

Is it possible we might strike more attractive trade deals with countries such as India, China, Singapore, the U.S., etc. than would have been possible in the EU? Would this attract more bankers and commerce to London from demographic powerhouses?

If China wants the RMB to become a reserve currency would London be a more attractive centre than New York or Frankfurt, the homes of the dollar and the Euro?

Will the fact that we will have the lowest corporation tax in Europe by some margin and much friendlier labour laws turn us into the “Hong Kong of Europe”?

Frankly I don’t have a clue and this is only the tip of the iceberg. But as it is in no-one’s interest to see a trade war and animosity between us and Europe, I find it very hard to believe the worst case scenarios are the likeliest outcome.

You only need to look at Hinckley Point and Greenlands’ new tower in Canary Wharf which will be the tallest residential tower in Europe to see the interest from China. Hinckley Point will create 25,000 jobs by the way. There is also the huge Chinese investment in Royal Albert Docks which they hope to transform into a Chinese business/commercial centre.

But one also has to think of how the rest of the world views Europe. Is it going to be any more secure from a terrorism perspective, from a currency perspective and from a political perspective? And quite frankly for those wishing to invest in property, the UK is still the runaway winner and will be if the financial centre disappears.

Despite all the upheaval London is still seen as the safest environment because of the rule of law, political stability and land titles. Whatever happens, the EU is going to be seen as more risky than the UK in those terms (would you open up or transfer business to France, Italy, Spain, Portugal, etc. if you were worried about political risk?).

We also have the small advantage of speaking English! This sounds simplistic but cannot be underestimated. It is most people’s second language and is the business language of the world which is why so many international families send their children to UK schools and universities rather than to the Sorbonne or other European universities.

Lack of free movement to the rest of EU is irrelevant to Chinese, Malaysians, Indians, etc. so if we change immigration laws to treat them as equal to French, Germans, Poles, Hungarians, etc. then that is no bad thing.

But what about the lack of strategy and the animosity between our politicians and their European counterparts?

Various opposition politicians and their acolytes in the press are berating Theresa May and the government for not having a plan and explaining it to us. I don’t know whether they are complete idiots or are just trying to score cheap political points – either way such bleating is unimpressive.

Because laying all your cards on the table at the beginning of a negotiation rarely proves to be a good idea. Indeed positioning everyone for a “hard Brexit” at this early stage means nothing. It is just an opening position in the negotiations.

The same is true when Juncker mouths off about what he is going to do to us. He is just playing bad cop to Merkel’s silent cop. It is likely we will see a lot more posturing and positioning from both sides. Remember Juncker is on record in the European Parliament as saying “When it gets important, of course we lie”.

Whatever happens with Brexit, we will see enormous infrastructure development and investment.

The property cycle shows that there is a far higher probability of property prices rising than of a crash - prices have gone up for centuries in the UK. In fact the only time the property cycle hasn’t held was during the two World Wars. If you look at recent history, there have been many shocking events that people thought would affect the London property market:

1. in 2001 people thought the world was irrevocably altered by the terrorists attacks

2. in 2000 we had the dotcom crash and the fear of Y2K when planes would be falling out of the sky

3. In 1998 Russia defaulted on its bonds, the Asian economies collapsed as did Long Term Capital Management which endangered the financial system

4. There were wars in Syria, Iraq, Afghanistan

5. The British Empire collapsed – imagine what the mood and predictions for property prices were like in 1950 and yet prices went up

6. Even when the UK was the sick man of Europe in the 70’s and early eighties, and there were sustained IRA attacks, prices went up in accordance with the cycle

Brexit will have no more impact on the property cycle than these events.

Does this mean that property is a one way bet? Of course not. In fact I can guarantee that there will be another massive crash which will make 2008 look like a tea party. You will want to avoid buying in the immediate run up to that.

But, for example, if you had bought in 2002, 2003, 2004 and even 2005 your property would still have been worth more in 2009/10, at the depth of the crash, than the purchase price.

However, there are exceptions to this and there are certain properties that were bought in 2001 which were massively underwater in 2009 so you must ensure that you acquire properties that will outperform.

So in 10 years’ time we will look back on 2017 as a fantastic time to have bought property.

The majority, however, will be kicking themselves as they followed the herd and delayed. Of course it may not seem like a good time to buy now, but then it didn’t in 1996, 1997, 1998, 1999, etc. In fact these are the very same type of people who delayed until 2006 and 2007.

Meanwhile, you will be sitting on massive price gains because you took action now while the herd dithered because they believe what they read in the press.

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