Prime time
Edie Lush CL ondon House Prices Set to Crash! The Capital's Property Boom Finally Ends! London Housing Bubble Pops!' As the reality of the US subprime property story leaks across the Atlantic, headline writers are gearing themselves to tell the end of the ten-year fairy tale of almost uninterrupted growth in property values in the UK, and specifically the end of the skyrocketing cost of housing in London. But is that it? If you bought your ideal Kensington gaff in the last decade, are you going to spend the next few years regretting your decision, unable to cash in and stuck in a stagnant market? And if you were still thinking of buying, is now the time to look elsewhere?
Not necessarily. London's stellar price growth levels may have topped out — few would argue that 20 to 50 per cent annual growth levels are sustainable — but endless quarters (or years) of falling prices aren't necessarily the corollary of contagion from the US property blues. And for those looking for an interesting investment, London property may still offer value.
To begin with, let's narrow the focus. For years the holy grail of UK property has been Prime Central London, defined by Savills as Mayfair, Belgravia, Knightsbridge, Chelsea, Notting Hill, Holland Park, Kensington, Hampstead, St John's Wood and Regents Park. This summer Savills' Prime Central London index noted an annual rise of 29 per cent. The so-called 'ultra-prime' residential property market — properties above the £5 million mark — rose an annual 48 per cent.
The story has been relatively simple. The UK's economic strength has continued to grow. The Bank of England said recently that London would enhance its position as a global financial centre. Merger and acquisition deals were up 71 per cent from a year ago, which bodes well for the City bonuses. And wealthy foreign 'non-domiciles' who are resident in the UK but not classified as UK-domiciled have enjoyed favourable tax treatment. Since they're taxed only on what they actually bring into the UK, regardless of how much money they've earned overseas, these so-called 'High Net Worth Individuals' continue to buy — and occasionally live in — London homes.
At least it was simple until the sub-prime market in the US shattered confidence. But before we foretell stories of crashing property prices, let's look at the differences between the US and London markets. The current malaise in the US housing market is not just sub-prime lending but the massive overhang of residential property on the market. Though builders cut back on housing starts last year, the numbers of vacant homes for sale continued to rise into the first quarter of 2007. Thanks to Hurricane Katrina, insurance premiums have risen by around 300 per cent in precisely those areas where housing stock increased. Finally, from June 2003 to 2006 interest rates rose from 1 to 51/4 per cent — an increase of 425 per cent.
Compare this with what we've seen in London. Interest rates have risen, but only from 3.5 to 5.75 per cent — an increase of just 64 per cent. Insurance premiums haven't risen significantly either. And the single biggest difference between London and other markets is supply. Within Prime Central London, there is very little additional residential supply added year by year. In fact, you can argue that in many parts of PCL supply is diminishing, as flats are knocked together to make larger flats or houses. And should you see price growth diminishing too rapidly, it will likely cause many to take their properties off the market and wait for the worst of the storm to blow over. Stephen Yorke, CEO of the Prime London Capital Fund (www.dngim.com), says that many of the people he seeks to buy property from have no financial need to sell. 'I am constantly viewing properties for sale by owners who have a target selling price in mind. If I don't offer that price, they'll simply take their flat off the market for another year or two and try again. They are marginal sellers. They simply don't need to sell.' His analysis of London's current market concurs. 'It is very possible that the prices of PCEs own subprime market could fall — basements, walkups, flats on busy roads or new builds — but any jitters in the bottom end of the market will cause those at the top to snatch their properties off the market. There is always demand for quality housing and if supply starts to dry up, this could well put a floor under prices.'
History bears out Yorke's claims. During the Mexican peso devaluation crisis, PCL house-price growth slowed in 1996 to an annual 3.2 per cent from 19 per cent the previous year. And as stock was pulled and demand stayed constant, price growth grew to 14 per cent in 1997. The story repeats itself during the Russian and Long Term Capital Management crises (1997-98) and the burst of the tech bubble in 2000. After 9/11 and Enron's collapse in 2001 and 2002, there was a year where prices fell by 0.6 per cent, but growth resumed by 2.5 per cent in 2004-05. And by 2006-07 prices were growing again by 22 per cent.
The demand side of the picture looks stable as well. The financial and business services sector grew by 10 per cent in the year to the first quarter of 2007 compared with 2.8 per cent growth in the rest of the economy. Almost a third of London's workforce is in this sector. Alistair Darling's recent preBudget report signalled Labour's intention to impose a £30,000 charge on non-domiciles only after they have been in the UK for seven years. This is hardly a threat likely to send most wealthy foreign residents scurrying from their Chelsea hideaways. In addition, by cutting capital gains tax to 18 per cent many High Net Worth Individuals will be encouraged to buy a second home.
And even if the credit crunch does affect the rest of the UK housing market, there is one final number worth mentioning. The correlation between Prime Central London prices and the rest of the UK is historically under 10 per cent. 'Prime Central London has outperformed mainstream London and the rest of the UK for 23 years,' says Liam Bailey, head of residential research at Knight Frank. 'While UK house prices have increased by 490 per cent, prices of prime property have risen by 680 per cent.'
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