30% falls in London property prices

We speak to dozens of potential London property buyers every week.

Some want to transact now and we have found some good opportunities for them.

But the majority are sitting on the fence. Noticeably they think that London property is a good investment, but they just want to see what will happen once Brexit is triggered.

However, there is also a small proportion of people who tell us that they will not buy until the market falls 30%. And it is always 30%. Not 25% or 35% but 30%. And this is nothing new. 30% seems to be THE NUMBER. Two examples automatically spring to mind:

UBS released a note in 2015 suggesting prices would fall by 30% and in 2003 Roger Bootle, formerly chief economist at HSBC and one of the Bank of England's 'wise men', said that “House prices could fall by as much as 30% over the next four years”.

He couldn’t have been more wrong, but the point is that people pluck 30% out of the air with no thought. It just seems to be a number with which people are comfortable. The question is how likely is a price fall of 30%?

Well instead of opinions let’s look at a few facts:

1. At the bottom of the crash of 2008/9 prices in prime central London fell on average by 18% according to figures from Lonres.

Did some properties fall by more? Of course, they did: Some people were desperate, forced sellers and they would have accepted very low offers. However, if you had waited for the market as a whole to fall 30% you would have missed those opportunities and would probably have failed to have bought on the way up.

The simple message is that you cannot wait for the market to do what you hope. You have to be actively looking for those individual opportunities that work for you (searching on the internet is not actively looking and you will not see the best opportunities because they are not negotiated over the internet). Trying to time the market without actively looking is naïve in the extreme.

But why would anyone expect the market to fall 30% now when banks, individuals and corporations are all far more financially stable than they were 8 years ago and the market only fell 18% then? There is no rational thinking behind this. Brexit may seem scary but it is a political issue not a credit issue like 2008 (more of this later).

2. In dollar terms, prices have fallen roughly 25% since 2014. Hence increased interest from overseas’ buyers.

Unfortunately, the main reason why some people think that prices are too high is simply because they are higher than they were in 2007. I am afraid that this is illogical thinking and is based on emotions.

The problem is that press headlines deliberately target emotions as that is what attracts readers which in turn attracts advertisers. The result is that the key points that affect house prices are overlooked: for example, M2 money supply is 60% higher than in 2007. So, of course, property prices are going to be considerably higher too. This simple fact is far more important than Brexit.

And unlike 2008 this money will not evaporate because the banks’ capital ratios are much more conservative than they were then, i.e. the gross over-gearing has been regulated away (for now) and the London property market is actually on very sound foundations.

But the nature of London and indeed other cities like New York, Singapore and Hong Kong means that their land prices and therefore house prices will continue to outperform - as an aside a house has just sold in Hong Kong for US $450,000,000 – yes, that is $450m US dollars in case you think it is a typo.

London is the economic powerhouse of the UK

London generates 22% of the UK’s GDP but it encompasses a total area of only 1,583 square kilometres. This is the equivalent of 0.65% of the UK’s landmass. Meanwhile its population is c. 8.63m or 13.25% of the UK population.

Is it any surprise that land and therefore property is valued so highly in this tiny section of the UK?

Unfortunately, these facts are never taken into account because the majority of people react emotionally to the prices rather than considering what has caused the price rises and what causes London to outperform.

This is not to say that the London property market is bullet proof. I can guarantee you that it isn’t. However, at this stage of the cycle, prices are nowhere near their peak.

Indeed, the current uncertainty is a good sign because it means that vast sums of money are sitting on the side lines waiting to deploy. This is not a repeat of 2008. In fact, the entire situation is completely different because in 2007/8 everyone was fully invested and heavily geared. Compare that to now.

The price falls we have seen are actually a good sign as they show a market that is functioning normally – transaction costs in the form of Stamp Duty have risen and prices have fallen accordingly, i.e. there is no irrational exuberance.

So, if you are interested in acquiring a property in London and can see how the facts paint a completely different picture to the scare stories propagated by the media and dinner party chatter, then now will prove to be a great time to buy.

Just as 1998, 99, 2000, 2001, 2002, 2003, 2004 and 2005 were all great times to have bought despite economists, city analysts and the media proclaiming otherwise. In fact, it was only when they started talking about “new paradigms” in 2006 and 2007 and that prices and the economy would continue up, that you should have been wary. Except most people listened to them and bought causing the final “crack up” boom before the crash.

And yet, most people still give great weight to economists’ predictions despite their track record on London property being almost 100% inaccurate. You couldn’t make it up. Noticeably those who make the most money out of property are those who do the exact opposite of what the economists recommend…

A final thought. The world economy is growing and more importantly the world’s richest are getting richer - there are now more billionaires and multi-millionaires than ever before. This means that demand for London property will continue to be strong. So, if you believe that there will be more money in the world in 10 years’ time then you also have to believe that London property prices will also be considerably higher.

The long term average annual price rise in London property is 8%. Even if you think that this will fall to 5% for the next 10 years, then a £5m apartment now would be worth £8.25m in 2027.

Now is the time to act. However, you must stick to the strategy: focus on best in breed properties and buy them at fair value or less, because in the medium to long-term they will always outperform.

So if you would like to discover how to find your ideal home or investment property that will outperform the market, please call 0800 389 4280 (+448003894280 from outside the UK) or email veronika@mercuryhomesearch.com to reserve a complimentary property acquisition blueprint.

This starts with a 60 minute telephone conversation with me where I will analyse your property requirements to create a blueprint that will give you everything you need to find the best opportunities in your target areas and price range.

This is information and analysis you will not see anywhere else and will give you the tools and knowledge to find better properties than the average buyer and to negotiate better terms. These are the strategies and techniques that we use to help our members acquire the finest properties in London on terms they didn’t think possible.

For example, we bought a property for a Middle Eastern family in 2014 at the “peak of the market”. They did nothing to it and in December 2016 they sold it for 7% more than they bought it. Not bad for a flat that was in worse condition than when they bought it and in a market that has apparently fallen 12.5%.

You will be able to ask me any questions that you have and I will also recommend solicitors, tax advisers, surveyors and anyone else you need to make your property acquisition as financially successful and stress free as possible.

The choice is simple. Do you want to rely on third-hand information that you read in the press based on predictions by economists and city analysts who are stuck behind desks in their offices? Or do you want to receive first-hand information from me, who is in the market every day, who has inspected over 23,000 properties and negotiated hundreds of millions of pounds worth of property transactions?

To use a sporting analogy, would you rather talk about tennis to Roger Federer or a journalist?

For more details and to reserve your free Bespoke Property Acquisition Blueprint, simply call 0800 389 4280 (+448003894280 from outside the UK) or email veronika@mercuryhomesearch.com now.

Best regards,

Jeremy