The Secret To The London Property Cycle

Most commentators on the property market react to the obvious.

This is why they tend to be months behind what is actually happening in the market.

Unfortunately this means that if you read the papers to understand what is happening then you will also be behind the curve.

Typically you will read vast swathes of newsprint reacting to house price forecasts by estate agents, the latest figures from the Land Registry and maybe even the employment figures and how these will impact property prices as wages and employment surge or decline.

But this is what everyone does, so you do not really have an edge. You need to look at what are the real drivers of the market.

So the best piece of advice I can give is: follow the money!

It sounds obvious but actually the stories are often more subtle than most people realise. For example the most important news story has not been connected to the property market at all:

The FCA’s (the financial regulator) Chief Executive has resigned having been pushed out of the role by George Osborne.

Why is this so important?

This is all part of George’s “new settlement” with the City.

According to the Financial Times Mr Wheatley “oversaw a regulator that extracted record penalties from the industry”. The FT also notes that government officials have “privately urged regulators to take a lighter approach as the economy improves” but that Mr Wheatley was not the right man for this as “he seemed to have a mindset that all bankers are evil”.

The article concludes that “Criticism of Mr Wheatley over the release of market sensitive information in a botched press briefing in 2013 on a life assurance market review is thought to have been a big factor in Mr Osborne’s decision.”

That last sentence has been brilliantly fed to the press. If Osborne had been that concerned heads would have rolled at the time. Indeed the position is supposed to be free from government manipulation, but if you ever believed that then you’ll believe anything.

The simple fact is that Osborne wants more credit to be created by the banks as this will drive the economy forward. It is this increase in credit that will fuel the next boom and indeed bust.

And this beautifully highlights how the property cycle works and why it will follow the same path it has done for centuries. This is something that very few people truly understand, but is something that I use to help my clients outperform the market and avoid trouble.

Here is a brief overview:

After a crash, the first part of the market to recover is prime central London – this is because the rich have cash and the banks will really only lend to the wealthy as they are low risk. The banks are also living in fear of tighter regulation in reaction to shocking lending practices.

After a few years the economy seems to recover and the banks complain about being unfairly targeted. Politicians see the economy recovering and want to fuel the growth – incredibly aware that if they choke growth then the electorate will throttle them at the next election.

Consequently the government relaxes rules on the banks a bit. The banks start lending more. The housing market continues to improve but this time house price growth is nationwide with many areas outperforming London.

The electorate is happy, the politicians are rubbing their thighs with glee and the bankers are making more money even though interest rates have been slowly rising during this period. However, there is still caution. People still remember the last crash so there is concern that the market is overheating.

About 11 years after the start of the last crash there is a dip in prices. Fear rises. Another massive crash is imminent scream the headlines. We’re all doomed. Except it turns out that prices soon steady – usually thanks to some minor intervention by the government/Bank of England.

Confidence returns. Unfortunately the belief now is that our omniscient protectors at the Bank of England/House of Commons really can control the markets. House prices begin to climb and then surge. Soon everyone is a property developer or is stretching themselves to ridiculous levels to get on the property ladder/expand their portfolio.

This time really is different! Property is the safest asset and if you don’t buy now then you’ll never be able to afford a home. Indeed why would you sell?

Fewer properties become available fuelling the boom even more. People are making a fortune. The government announces that a new economic era is upon us. Many realise that this signals the time to get out or reduce one’s exposure. However, greed is a powerful motivator. The market may “give you another 10-15% if not more. The party is rocking, the music is loud. Only a bore would stop dancing now!

The market surges even higher. Hallelujah! Croesus couldn’t imagine such riches.

And then just as everyone is feeling smug and invincible a crushing body blow from a black swan puts the market on its knees followed by a right hook from another swan that has gate-crashed the party.

The party turns from triumph to disaster.

A bank or two goes bust. Elections are lost. Gnashing and wailing. The FCA is lambasted for missing the signs of the crash and is renamed GUF. Banks receive record fines. Austerity, “one nation suffering together”, blah, blah, blah. Political claptrap rules, “This will never be allowed to happen again” promises the new Prime Minister despite all evidence to the contrary.

And then prices slowly begin to steady. Slowly they begin to rise especially in London. However, the majority of people believe this is a bull trap. “Prices won’t go much higher” is the received wisdom, “Have these buyers not remembered what happened after the last crash? Anyway, it’s only London that is benefitting, the rest of the country will never recover from this”.

And the cycle begins all over again. Of course you can use this knowledge to your advantage.

Indeed this is one of the many reasons why my clients are so keen to recommend me to their friends and colleagues. My understanding of the property cycle, coupled with my knowledge of the prime London property market and negotiation skills mean that they have an advantage over other buyers that gives them the edge whether buying homes for themselves or investments.

If you are serious about acquiring a property in London, then you need to ensure that you understand the cycle and the market. Yes, it is time consuming but achieving superior returns is rarely easy.

Best regards,

Jeremy McGivern