Apocalypse now: London’s property crash has begun | Hacker News Reader

Apocalypse now: London’s property crash has begun

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55 pointsrandomname260 comments

I'm sorry, but this article just seems bizarre. It's not economically literate - it doesn't actually examine the cost of a house relative to earnings and access to mortgages. It doesn't make any attempt to quantify how much money foreign entities actually invest in London. It doesn't cite any evidence that prices have even started to drop!

Let me tackle this. Firstly, interest rates are still at historic lows, it's cheaper to buy a house and pay the mortgage than to rent, so that core reason to buy is still there. The only limit is deposits. The government has just handed £5k to every first time buyer in London (stamp duty cut). That's not going to cause lower prices.

Foreign investment doesn't come from Saudi Arabia, it comes from Hong Kong and Singapore and Malaysia.[0] So his entire argument there is just misinformed.

None of the evidence he sighted actually points to a price crash now - it points to long term pressures for prices to drop. You could have made that argument 5 years ago.

Don't get me wrong, I'm not saying house prices won't drop at some point. This just doesn't argue it at all well. It's more wishful and wishy washy thinking that anything else.

There are far better arguments that the prices will drop in 2019/2020 - when interest rates recover, buy-to-let investors will get stung by harsher taxes and Brexit actually happens.

[0] https://www.theguardian.com/society/2017/jun/13/foreign-inve...

Plus the additional stamp duty on second properties, reducing the profitability of BTL

OK, but you have to admit that Damian Reilly writes beautifully. I'm looking forward to his next story for its entertainment value.

As a Londoner, 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.

> Very (very!) roughly, if long term mortgage interest rates half, we would expect property prices to double.

This is only really true if interest payments dominate capital repayments. A move from 10% to 5% (which happened in the years 1995-2005 [0]) might cause prices to double, but a move from 0.5% to 0.25% won't.

On the other hand, it's instructive to play with a mortgage repayment calculator. You can get a five-year fixed rate on a 25 year mortgage for 2% per year at the moment: that means £424 / month. If the rate increases to 3%, you pay £474/month. That's an 11% increase in mortgage payments - i.e. an 11% drop in purchasing power. So either people pay more on their mortgages or house prices drop.

The market is only pricing in a rate hike of about 0.4% in 2018. All other things equal (which they never are) the pricing of swap rates suggests a drop of 5%. It's worth remembering we're in a hiking cycle.

[0] http://www.bankofengland.co.uk/boeapps/iadb/fromshowcolumns....

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.

This is generally only the case if you buy a leasehold property (which tends to be the case for all flats/apartments granted). Most houses are sold freehold.

It's not at all a unique setup, sadly.

If you have a freehold, then you own the land. With a leasehold, you don't own the land. This concept exists in most parts of the world.

The worst part about this concept is that home owners that don't own the land will try to sell you the house like they own the land. This is why I never look at these properties. They should be cheaper, but they are not.

And it may be that the best bit is that with 'leasehold' you have legal protection from responsibities (often due to said leaseholder) which lie in the province of the freeholder. It's not always such a smart idea to have a freehold property in a city.

Because in practice it usually makes little difference. Ground rents are often as little as £10 a year.

That's not true - there have been a bunch of cases recently where the ground rent is much more than that a doubles every x years

https://www.theguardian.com/money/2017/jul/25/leasehold-hous...

"Yes, that is right. The LAND doesn't come with the HOUSE."

This is absolutely not true. Just because most of the house owners pay rent to the land owner, doesn't mean that you can't buy houses with land or just the land itself.

> Yes, that is right. The LAND doesn't come with the HOUSE.

You say that it "comes" as if it was a universal constant, not affected by parties that sign the contract. I'm confused - are transactions involving land somehow forbidden by law?

No, a leasehold is basically the right to live in a defined space/flat/house on a given piece of land. It is essentially a very long rental agreement.

A freehold is where you own the house, the land, and the right to dwell in said land in perpetuity.

A leasehold however allows you to dwell in a flat(for example) for a defined time (99-125 years is popular) you agree to maintain the internal spaces (typically from the plaster inwards). You will pay a "ground rent" for the right to use the land that your flat is located on. In return the freeholder (the person/company) that owns the whole building and the land, is responsible for the maintenance and upkeep of the fabric of the building. They are allowed to issue a "service charge" to recover the reasonable costs of upkeep and repair.

Crucially you never own the "fabric" of the building, or the supporting land.

So, can't the original owner of the house and land decide whether to offer freehold or leasehold agreements?

Yes and no.

For leasehold house, then its very simple, the leaseholder can buy the freehold. Or the freeholder can make an offer to the leaseholder.

For a block of flats, its a bit more complex. If a majority of the leaseholders club together, they can buy the freehold, and create their own management company.

This sets out in more detail how and when things can happen: https://www.lease-advice.org/advice-guide/houses-qualificati...

The recent scandal about doubling ground rents can be rectified if the leaseholder buys the freehold, but that is expensive, especially as the houses are effectively unmortgageable

A leashold will have a "pepper corn" ground rent, which should be around £10 a year.

Anything else and you need to walk away.

Basically buying anything other than a flat through a leasehold is a scam. That goes for "share of freehold" which is a leasehold, just called differently. Those should really be avoided, because they are basically houses that have been sub divided. This means that the leasehold agreement will be of varying quality.

Either way, you will need to find a competent conveyancer, one that is paying attention and actually reads the contract and leasehold agreement. (basically do not use the ones that are provided by the estate agent/seller/other)

Freehold properties are by far the norm in the UK. Leasehold usually only applies to flats/appartments. You are making it seem like leasehold is the norm which is absolute nonsense, dare I say fraudulent.

Flat conversions aside, what he's describing is a common practice amongst builders of new-build homes, which I assume is the experience he's most familiar with.

Developers will allow the freehold to be purchased, although restrictive covenants can be attached - in effect, binding the homeowner to similar restrictions as if they were still leaseholders.

The Government recently announced that it would be banning the practice of charging ground rent for properties on leaseholds longer than 21 years.

https://www.gov.uk/government/news/crackdown-on-unfair-lease...

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!

There is certainly a significant slowdown and a tsunami of stock of new built luxury towers coming to the market. Just in canary wharf you have perhaps 10 residential sky-crappers in construction now. They started slashing the asking price but I don't even know if all of them will be completed. While rates are low, sellers can abstain from selling which is what I understand is happening now, transactions have dried out. But rates are on the way up and people will be forced to sell (relocation, divorce, family expanding, inheritance, etc).

In a non-violent conotation (think of it as economic/financial warfare) I will just paste the Rules of Acquisition #34 and #35

34. War is good for business.

35. Peace is good for business.

In an economic warfare like this, opportunities will arise. As long as the key players are not the same who brought this disaster, it has a better chance of building something sustainable.

> 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.

This seems to be contradicting itself: it's not a bad thing that house prices come down if they're too high. Arguably they should be brought down if they're too high (ideally in a more controlled manner, no one wants prices to collapse in a catastrophic manner). As such, shouldn't we be welcoming Corbyn's strategy here?

> While undoubtedly a lovely sentiment, Jez, making state confiscation threats out loud isn’t great for shifting houses to minted foreigners.

As if we should endeavour to endlessly bow to the wishes of foreign investors? Running your own country into the ground and making it hard for your own citizens to live there doesn't do you any favours. Foreign investors should take a backseat to ensuring the people who live and work there can actually afford to and aren't having to suffer exorbitant rents.

It entirely depends on your perspective. I think the article is relatively balanced on either side, both stating the positives and negatives for the property market failing and also making tongue in cheek remarks about Londoners.

Personally I think the state stealing property is not a good thing, however, this could be a good thing if you take the opposing view.

Whilst attempting to seem like they're presenting both sides of the argument they do misrepresent what Corbyn says: he's never says or implies that the state will steal the property, he says houses/apartments/etc that are kept vacant would be bought and turned over to residents who need the accommodation.

I don't think it's particularly partisan to say that's not a bad thing, in my experience when the government buys something off citizens they usually do it for a very good price, so it's not like it will be taken from them with no notice and no recourse.

if the government enters the property market buying property at market prices it will have the opposite effect and raise prices. i could only see it lowering prices if they 'steal' property by forcing sales lower than the market price.

Ah, I have not kept myself well informed enough. Thanks for clarifying!

>>> While undoubtedly a lovely sentiment, Jez, making state confiscation threats out loud isn’t great for shifting houses to minted foreigners.

I found this passage very strange. Throughout the article, the author seemed to be advocating the position that most Londoners seem to hold: that houses should be for people to live in, and not for overseas property investors to use as an investment vehicle. So why should anyone be concerned about "shifting houses to minted foreigners"?

Legislation that would stop housing being kept deliberately empty by overseas investors has been shown to be hugely popular with the public – but that's not mentioned by the article, either.

I think he was just pointing out that it is contributing to the uncertainty in the market, and therefore increases the chances of a crash. I didn't read it as a criticism of Corbyn per se.

Title should read:

"London house prices suffer a blip, will recover in a year to 18 months"

Read the blogs own reference: http://uk.businessinsider.com/london-house-prices-2-drop-in-...

2% is not a crash, nor an Apocalypse...

  > 2% is not a crash, nor an Apocalypse...

Perhaps overall, but the article is mostly talking about the high-end market. From the reference:

  > Prices falls are concentrated in the most expensive areas of London...
  > The top 11 of London's 33 boroughs are down an average 7% annually...
  > Kensington & Chelsea .. have fallen sharply there by 12.9% in the last year — more than £200,000.
  > Prices in Camden fell 10.8%, the City of London by 18.2%, and in Wandsworth by 12.7%.

Perhaps you meant the lowest end, as this part more closely resembles your 2% drop:

  > The 11 cheapest boroughs have seen a modest fall of 1.3% over the year overall...

>>> the cost of getting by — long ago went past insane (£17,040: the cost per year of educating a four year-old child at Thomas’s school in Fulham, not including uniform).

Note that this is only if you send your child to private school, not merely "getting by". Even among the middle classes, this is not very common, especially at four years old. The nicer parts of London have some of the best state schools in the country.

Spot on, and looking at the last paragraph: > Whisper it: 2018 will be the year smug Londoners finally stopped boring on about basement and loft conversions at smart dinner parties Sounds like someone who just against rich rather providing facts. The article seems to target the expensive areas in negatively emotional approach.

'The nicer parts of London have some of the best state schools in the country.'

Which, ironically, is a major driver in the rising cost of housing in these areas.

Another thing which non-UK readers might not be aware of is that the UK government introduced a "Help to Buy" and "Lifetime" ISA, which is essentially an account with some bank where, any money you put in (up to a certain limit), the government will give you an extra 25% free if yiou use it to buy your first home. While this might seem to help with home ownership, I think studies have shown that it only really benefits people who were already saving hard, and thus it only really contributes to house price inflation. I'd be interested to know if other countries have similar schemes.

Australia has the "First Home Buyer's Grant". It just serves to inflate the general price of houses though.

Yes, it's a pity that went south.

For readers not familiar with this mechanism in Australia, sellers just raised prices by the value of the grants.

And for people not familiar with economics, the pool of potential buyers all ended up with the same bonus and used that bonus to bid up the fixed pool of available housing stock.

Interesting. How long ago did that get introduced and is there any studies on impact on prices?

I wonder why these first-home grants (many countries have them, Australia, Canada and New Zealand for example) don't say - use this but only for a house within 5% of government valuation. That way, the price can't be inflated. Sure - for now, many may not be able to bid on a property but once prices start to fall this should make sense.

This is because the actual reason (for the First Home Buyer's Grant in Australia at least) is to stimulate the building industry. It is not to make housing cheaper.

If we are talking about Government schemes that actually raise housing prices then the Help To Buy Equity Loan needs a mention too. This has only served to line the pockets of developers - I still cannot believe they extended the scheme. https://www.helptobuy.gov.uk/equity-loan/equity-loans/

help to buy also means the government has an increased financial interest in increasing property prices because they have a larger portfolio of properties that they have a direct equity share in.

So basically I am paying taxes so that someone who is fool enough to pay there overpriced flats, can buy a flat, which will go bust because this pricing scheme is not sustainable.

Well done UK Gov/HMRC, it's good to know that HNS is bleeding but you feed the sharks!!!

Ditto the government's reduction in stamp duty for first time buyers. On the face of it the buyer is saving £3k (for example), but now that all of the first-time buyers have an extra £3k in their pockets, guess what happens to house prices?

We got the same thing in France with the various welfare programs to access housing (mostly for renting, but there's also some when buying): the APL, for people in the lower income brackets but not living in social housing. But it just raised rents and house prices, which is detrimental to the people in the brackets above the limit.

In Italy there is a different taxation on the buying contract sum.

First home it is 2% if bought from a private and 4% if bought from a firm, in this latter case it is VAT (and some types are excluded being "luxury").

Non-first home is 9% if from a private or 10% VAT if from a firm (up to 22% for some types that are considered "luxury").

Then usually banks provide "special" loans at a slightly lower rate to "first home" buyers, but that has nothing to do with the government.

Which London though?

There are a lot of different boroughs, and the way their house prices move seem to be somewhat independent of each other.

The bottom falling out of Kensington because there is no oil money seems like a vastly different situation to just generally people wanting to live in outer suburbs.

I don't think that any borough was left un-manipulated. I spent some time in Deptford.. (yes Deptford).. very lovely and alive place, nice community gym, flea market, train lines that take you to LB/CS..

A 30sqm studio went for £1.3k. With that money in some EU capitals you rent a 3 bedroom flat in a brand new & modern building (parking included).

Nope. Demand still exceeds supply otherwise the government wouldn't be trying to build thousands of new houses and flats each year. Also, London is an employment hotspot. When people stop moving to London, then prices will drop. UK net migration is still over 200,000 a year, so that's 200,000 people on the demand-side of property prices.

I think the top of the market is falling as foreign buyers are deterred for various reasons. You are right though, there is so much demand for entry level homes a substantial crash is unlikely

Most people aren't sending their kids to private school, I stopped reading at the point where they talked about school fees - this simply doesn't affect the majority of people.

While it might happen, I can't help but think articles like this are partly wishful thinking and partly trying to be self-fulfilling prophecies. I find it's extremely hard to get unbiased opinion about markets, even from friends, because you just don't know if they are actually in the market themselves.

Having been observing the market closely for a few months, it does look like the asking prices for many £1-3M properties are being reduced. When you consider inflation is running at 3% in the UK currently it's easy to see house prices fall by 10% this year.

On the high end, it's easy to see that figure reach 20-30%. At the entry level of the market though, there is still so much pent up demand for housing I personally can't see any significant falls, just growth flatlining.

Asking price is irrelevant, the price at which the property exchanges ownership matters.

It's like the people that insist their super special collectible widget is worth $5000 because there is an eBay listing with that price that has been up for 7 years and not sold.

The sentence "It’s not all skagheads in tenement blocks running up these debts" really shines a light on the author.

Pretty offensive, I thought.

In what way? There are people who do think this. He's saying it's not correct. Is it the use of specific words that's offensive?

A rather bitter article,let's not forget the last time prices crashed was after the banking crisis 10 years ago, and then subsequently recovered all their losses and went up some more. The fundamental reason for high prices in London is a serious lack of supply. Until that's solved, prices aren't really going anywhere.

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