Content adapted from this Zerohedge.com article : Source
Historically, real estate is looked at as a hedge against inflation. Returns of 3% per year, an amount slightly ahead of inflation, is considered normal.
This is not the case in certain cities like New York, San Francisco, and Toyko.
One of the worst offenders is London.
Spurred on by insane escalation which priced most folk out of the market, a semi-detached home in this ciry went up 553% the past 22 years.
At last, the gala is ending.
The London real estate market is already seeing the early stages of a reversal. Homeowners are dropping their prices tens of thousands of pounds to get things moving. This situation could turn ugle very fast.
There are four main factors causing this drop.
1. Brexit is the most obvious factor frightening away potential buyers. Why would anyone purchase a property now in the capital when such an enormous and ominous question mark hangs in the sky? International investors keen to use London as a glamorous base from which to access European markets are understandably cautious — despite some misleadingly high profile 2017 Chinese investments into landmark London buildings — while the threat of a banker exodus is very real (property prices in Frankfurt are spiking as I type). According to the latest report by property data experts Molior London, sales of homes in the capital dropped by 20 percent in the last quarter of 2017. The report added some 15,000 recently completed luxury apartments remain unsold. For market watchers this is an amazing departure from the status quo, when London new builds were snapped up by global investors often before a brick had been laid.
2. The sustained low oil price is also very bad news for London property, chiefly because it means wealthy Arabs — traditionally big-time investors in the capital — are no longer so wealthy. Since Saudi Arabia went tonto on American shale producers in 2015, opening all the spigots to flood the market with cheap oil in an effort to drive them out of business, Gulf Arabs have had a lot fewer disposable petrodollars to put into Mayfair and Knightsbridge pied-a-terres. In fact, virtually all Gulf states are currently running heavy budget deficits, meaning there is significantly less cash washing about at the top of the London property market — bad news for property sellers down the ladder.
Dr Eckart Woertz, an expert in Gulf economies and senior researcher at the Barcelona Centre for International Affairs, explains: "The low oil price means there is less money to invest. In fact, most Gulf countries are now repatriating money. Look at Saudi Arabia — they have repatriated $200bn of their foreign reserves. The appetite to invest large-scale in London real estate by the big sovereign wealth funds and wealthy individuals is much reduced, which is unsurprising given the yields that are available."
He adds the recent Riyadh Ritz sheikhdown by Saudi Arabia's de facto ruler Mohammed bin Salman of 100 or so of the kingdom's richest men has sent a powerful message to other wealthy Saudis considering investing abroad. "They cannot do it as much now — they cannot wire big amounts. I know someone who has set up a real estate development in a European capital… he has Saudi clients who are telling him they cannot get more than ten million dollars out of the country. Wiring money now raises suspicion."
3. For those of us who would love to be worried about the difficulty of wiring ten million dollars,** the prospect of Jeremy Corbyn waiting in the wings to become Britain's next Prime Minister is a rather more relatable bad omen for London property values.** Corbyn, who at the time of writing was priced at 3–1 to be Britain's next leader, would head up a socialist government very different in outlook to the nakedly capitalist ones that have presided over the capital's property boom. Corbyn, for example, has openly advocated large-scale "requisitioning" of homes owned and left empty by wealthy investors in order to give them to the poor. "It cannot be acceptable that in London you have luxury buildings and luxury flats kept as land banking for the future while the homeless and poor look for somewhere to live," he has said. While undoubtedly a lovely sentiment, Jez, making state confiscation threats out loud isn't great for shifting houses to minted foreigners.
4. And then there's perhaps the most overlooked factor affecting the market: after years and years of being squeezed relentlessly, the indigenous London middle class, as it is in the wider UK, is largely skint. According to a recent survey by comparethemarket.com, a person in Britain is on average £8,000 in debt, not including mortgage repayments. Last June, the Bank of England announced UK unsecured consumer credit had gone over £200bn. It's not all skagheads in tenement blocks running up these debts. Research has repeatedly found that more than a third of people using credit cards on a monthly basis to make ends meet earn between £50k and £70k a year. In London, where living costs are highest, the pain is felt as keenly, if not moreso, as it is anywhere else in the country. With interest rates expected to start rising in earnest this year, that pain can be expected to intensify horribly.
Forget plateau or coolings. When it comes to the London property market, crash is the only word that applies.
Non-adative content found at zerohedge.com: Source
The low oil prices and Brexit indeed have hugely played a role in the falling of house prices though I feel brexit's effect has not affected to a large extent as we presume. it's just that a clear resolution has not yet been made about the brexit negotiations which is partly impacting negatively on residential sales and prices in localised areas. These falling prices could have been an advantage for the house buyers seeking to settle in london but still london is an expensive market.
On addition to the factors causing the drop is the increase in the interest rate which has affected the house prices keeping away many potential house buyers and driving those already in the market away. Stock of housing has also grown so fast as extra supply has added to downward pressure on prices.
Good insight
You have record ownership of single-family homes by hedge funds and private-equity funds. They bought these things up in ’09 or ’10 or ’11, and their plan was to rent them out for a while and then sell them to other tenants.
The problem is the tenants are now broke. They have credit card debt, low paying jobs, auto debt, they can barely afford to even rent the houses! In New York and other IS cities the rent has skyrocketed, I’m certain it’s the same in England’s cities such as London.
Your posts are giving me huge informations and it’s very valuable.
One thing to realise about London is it is no longer the industry capital of England, because of the high cost of rates and rents, the congestion charge and the sheer weight of traffic to actually deliver goods inside the capital industries and factories are moving outside to places like Cambridge and Essex where they are cheaper and accessible easier by rail and road.
This does not help with house prices as fewer people need to live there.
Add in the uncertainty about brexit and what is going to happen regarding trade and industry then London will be for tourists and nights in the theatre not for living and working
I am completely baffled that prices in cities such as this are able to maintain their values. The two U.S. cities mentioned "bubbled" years ago yet it still keep going. I guess there is that much money out there considering the fact that these houses keep getting bought.
The average person fell further behind yet we see home prices going through the roof. It is hard to understand how it can be.
Like most bubbles, this one is credit induced and the fallout is bad. I would be curious to know what the amount of debt on London residential properties is, for example. How many billions are about to go bad.
I believe that in each action, there is always a solution. Let look at this scenarios:
The U.K has seen its economy rising over the past years and then started dropping inline with the brexit scenarios. This obviously shakes the market and this were the whole problem is based.
I would say that an increase in price will either shift the demand or the supply curve to the left or right depending on the type of commodities.
I think the U.K should look on intermediaries expertise where by though outside the Europe circle, they should always be trading with them with low tax charges. Developing their market outside their countries will surely bring investors inside the country.
The U K economy is said to be strong but can't stand alone. The level at which the world is moving calls for worldly support and free exchange, which was then implemented by the E.U.
Rising prices lead to rising debt among people as they still want to be able to afford the same things as they did a few years ago while simply forgetting about the fact that their salaries didn´t increase in a similar ratio. But they mostly don´t have a choice after all as they need a place to stay, one close to the place they work so they have to come up with the money for it somehow even if that means taking on more debt...
The property bubble will burst again and again all around the world leaving thousands or even millions of people behind with even further debt in the end. It´s an endless game that keeps us working forever while the rich keep accumulating one billion after the other...
They will just buy everything up once people start to lose their homes, it seems like every market is being manipulated and the rich people(very rich) just don't care, which is something really disconcerting. Like why? Why do you even want so much money?
I truly feel some major changes are going to occur, people are getting fed up with all the manipulation. Banks getting bailed out while people lose their homes? Spending so much money on military instead of fixing infrastructure or creating help for people? Like, what the hell, how are we unable to stop this kind of thing?
We follow this convoluted system only because we think we have to. When was the last time things actually changed for the better under a new president or from a new law?
Resteemed and shared on other platforms. This is a very important article for those in international property interests.
I think that the real estate in Londo as well as US and other countries is in a biggest bubble ever including bonds and stocks. I think one of the reasons is because the last two times the housing market went down, the Fed was able to bail out investors who bet on one bubble by inflating a bigger one. So, a lot of real estate buyers and investors all over the world may have been conditioned to believe that even if the market implodes, if they hold on, they'll get their money back. But you know, the third time may not be worth waiting.
@zer0hedge..bro My favourite sport walking home from the pub in London was pulling down the prolific visual pollution of estate agent boards left up with 'sold' signs to gain free advertising space.
The fuckers would come around regularly to put them back up... even the ones that happened to fall in dog-doo.
Glad that I sold both my London properties (owner occupier) without the 'services' of estate agent parasites. Their job is to tell the seller their property really is worth what they've listed it for and to talk the buyer up.
If Germany had any sense about it they'd make the seller pay real estate commissions. Right now for the seller its a free service and they can be as lazy as they want to and make the buyer pay for it.
They used to do this with rental apartments, and changed in 2016 I want to say where he who orders the real estate agent pays for it -- amazingly thereafter many landlords decided it was wise to rent their apartments themselves and not engage a real estate agent. Funny how that works. Thank you for sharing with us
The largest cost for any criminal enterprise is money laundering. It costs far more than 50% of gross profits to launder money. With banking controls (yes, they do exist) and stricter laws, it can cost in excess of 80% of gross profits to clean your cash.
Real estate in London might fall by 50% or even by 75%. But that is still much, much better than paying 80-90% to an HSBC banker for a complex, multi-country laundering scheme. This goes a long way to explaining London and Singapore property prices.
Frankly, I never understood why anyone would want prices to go up. If I were looking to move up or down the ladder, I would prefer prices to drop. We don't buy and sell houses based on yields. We buy and sell based on real numbers. If I own a £100k flat and want to move to flat twice as big, I would like both to lose 50% of their value. Then I would get my new flat for only £150k instead of £200.
A rather thin and sensationalistic piece. While everyone would love for property prices to crash, share prices to collapse and everything to become miraculously cheap again, nothing mentioned hints at this.
Oil prices? Might have driven the run up in properties in Mayfair but are all these owners suddenly going to hit the market to sell as they desperately need cash? I don't think these buyers are particularly hard up.
Similarly, the 8k debt figure is across the UK. Not really relevant to those spending £1 million+ in central London.
Yeap, it's depressing for buyers in London, SF and NY. Either figure out how to make a high salary or don't try climbing that ladder!
A somewhat thin and dramatic piece. While everybody would love at property costs to crash, share costs to crumple and everything to wind up inexplicably shoddy once more, nothing specified clues at this.
Oil costs? Might have driven the keep running up in properties in Mayfair yet are every one of these proprietors all of a sudden going to hit the market to offer as they frantically require money? I don't think these purchasers are especially hard up. Essentially, the 8k obligation figure is over the UK. Not by any stretch of the imagination applicable to those burning through £1 million+ in focal London. Yes, it is discouraging for purchasers in London, SF and NY. Either make sense of how to make a high compensation or don't take a stab at climbing that stepping stool.
Informative post.Much obliged for sharing it
@zer0hedge..bro My favourite sport walking home from the pub in London was pulling down the prolific visual pollution of estate agent boards left up with 'sold' signs to gain free advertising space.
The fuckers would come around regularly to put them back up... even the ones that happened to fall in dog-doo.
Glad that I sold both my London properties (owner occupier) without the 'services' of estate agent parasites. the living room, dining room, here is the kitchen. Out the window is the garden and upstairs you have three bedrooms. Should you decide to purchase this property, please be advised closing is conditional upon exactly 71.180€ appearing my bank account [hands you card with bank account info on it] and me releasing the property. Have a nice day. [Next viewer enters literally five minutes later.]"
They do an hour of work, pay approximately 35€ to list the property on immoscout or immowelt and rake in 7+% of the purchase price.
Vampire leaches...thank you for sharing with us
One thing that really makes me angry about owning property in England is the (imho) fraudulent setup where I buy house (or flat) and have to pay rent to the land owner. Yes, that is right. The LAND doesn't come with the HOUSE.
Also money laundring helped plenty, on insanely inflating the prices - money from anyone who could afford this. There are buildings in London that are empty. Kind of like a piece of jewelery that you keep as a safe-keep in the safe (but only bigger).
That said, it is a pitty that plenty of people will see that they got a mortgage of 999 for a flat that "now" costs 200-300,but it is healthy for this parasitic/fraudulent behaviour to end.
I'm sad to say high property prices seem sustainable.
With a decent deposit, you can borrow long term at around 2%, which makes living in a £0.5m flat cost £10k a year, less than £1k a month. That's very affordable for a couple.
The problem is the vicious cycle of low interest rates. I would argue that most important variable affecting house prices is long term expectations of interest rates. Very (very!) roughly, if long term mortgage interest rates half, we would expect property prices to double.
In the past decade, property prices have been driven up by very low interest rates, which have meant that's its affordable to service very large mortgages. Interest rates have stayed lower, for longer than anticipated, which has driven higher and higher prices
The problem is that these low interest rates have increased the potency of monetary policy: with higher house prices, an increase of 1 percentage point on mortgage rate hits you really hard. Previously a movement from say 5% to 6% interest on your mortgage mattered less.
This means that rises in interest rates will be smaller and take longer than historically, 'locking in' high property prices. I don't expect to see interest rates return to 'normal' levels any time soon.
I'm not arguing that the market is not overinflated, but I doubt there will be anything like an apocalypse. Maybe we see prices coming down 10%-20% at most.
When most people living on credit cards are earning about £50k, that's a serious thing to consider in 2018.
The prices of most things rising, and the same credit cards are not really comfortable to live with.
The property crash is going to be happening mostly over and over.I suppose there are many other hidden unknown factors that are even making this more harder for most people. But this happens all over the world. In africa it's even worse.
For london hope, everything gets in control soon.
Otherwise most people are having a hard life.
I like this but no way to do @zer0hedge
Thanks for the informative post!!
good post. thanks for sharing.
So what would you say could be done to London real estate to bring it back on track
I live in Turkey.the situation here is no different.I'm a student student rent prices are much more.I think a global problem
The problems that arise from the tenants have always been the homesick dream of their hosts. There are many troubles such as rents that are delayed in the unpaid area, damages to the houses, mischievous fixtures, complaints from the neighbors. Placing the rents in the bank and transferring them to the owners in real time is one of the most important principles of the real estate agency.
With a good deposit, you can borrow about 2% long-term; which gives you £ 10k per year at a flat cost of £ 0.5m, less than £ 1k per month. This is very convenient for a couple.
The problem is the vicious cycle of low interest rates. I argue that the most important variable affecting home prices is long-term expectations of interest rates. Very (very!) Roughly, if the long-term mortgage interest rates are half, we expect the real estate prices to double.
Real state is risky
For me the number one reason for the slowing Real Estate market is BREXIT. I also think the Brexit effect is yet to be seen, but certainly London will have to face the consequences. A lot of people in London, who are solid earners prefer to pay their rent to the bank in the form of credit and to " own" a home, instead of paying rent. This all changed with the uncertainty that came with BREXIT.
Well, first of all, I wanna appreciate your contribution to the rapid change real state business in the city, that contains many attractive histories background in many manners, I never heard about this issue before as a little bit contributor of this community.
This article is difficult to digest, not due to its not well researched, cause the things which the articles tell, London is the dream city, many of us, but after go through this bad situation which is growing very fast is discourage the new individual, the city already a huge population, the inflation ratio is much higher, and its rapidly and promptly change day by day.
All of the above reasons, based on authentic values, that how I take it, According to the latest report by property data experts Molior London is much beat down the mental condition of many of us, although the i agree with the oil market role, nowadays it full of speculation, everyone is doing invest on extreme conscious basis, it a true reason for dropped the value of real estate.
Debt, debt and debt, these issues are facing approximately all around the world, their should be a proper solution, to avoid such circumstance, although the burden will surely increase day by day.
Thanks for your contribution, its indeed and helpful, keep sharing such stuff which blows the mind, and leads to the actually reality...
Thanks a lot...
Blessed you...
Steem On...
Great to know
Living inside the big cities and the important places is getting expensive, and 553% the past 22 years is unthinkable. We are seeing that the more developed is the country this fenomeno takes over and house prices get super high, but eventually this prices have to come down, and we might have a new problem in our hands.
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