London house prices face perfect storm as Brexit risks rise

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London houses May17The UK goes to the polls on 8 June in a surprise General Election.  And premier Theresa May has clearly decided to base her campaign on a “Who governs Britain?” platform, as she highlighted when launching her campaign last week:

“Britain’s negotiating position in Europe has been misrepresented in the continental press, the European Commission’s stance has hardened and threats against Britain have been issued by European politicians and officials. All of these acts have been deliberately timed to affect the result of the general election that will take place on June 8….there are some in Brussels who do not want these talks to succeed. Who do not want Britain to prosper.”

In reality, of course, all that has happened is that Brussels is behaving exactly at Theresa May herself forecast, when campaigning a year ago for the UK to Remain in the EU:

“In a stand-off between Britain and the EU, 44% of our exports is more important to us than 8% of the EU’s exports is to them….The reality is that we do not know on what terms we would win access to the single market…It is not clear why other EU member states would give Britain a better deal than they themselves enjoy. 

May’s rhetoric will no doubt give her a large majority, given the weakness of the Labour opposition.  She has also promised to be “a bloody difficult woman” during the Brexit negotiations that follow the election. But what is good for an election win, may not be such good news for London house prices.  These are at all-time record levels in terms of the critical price/earnings ratio, and were already heading into an inevitable downturn as the City AM chart shows:

  Massive over-building at the top end of the market means there are now 59k high-end apartments under construction in London, yet annual sales of new-build flats are just 6k
  Sales have also been hit by the hike in purchase tax (stamp duty) to 10% above £925k ($1.2m) and 12% on purchases over £1.5m
  The UK’s 2 million ‘buy-to-let’ landlords, most of whom are in London, have also been hit by a combination of a higher tax take on their income and tighter borrowing criteria for mortgages
  China’s capital controls means its buyers have had to pull back, as it becomes more difficult to move money overseas.  They have been the largest buyers of residential property in central London

Now this downturn could well become a perfect storm, as May’s “battle with Brussels” risks an exodus of highly-paid finance and other professionals from London.  As the BBC reports: “More than one million people work in the financial services sector in the UK and it pays over £70bn a year in taxes to the government, 11.5% of all receipts.

FINANCIAL SERVICES ARE PREPARING TO LEAVE LONDON 
The CEOs of the world’s 2 largest investment banks have already warned of difficult times ahead.

  JP Morgan CEO, Jamie Dimon, has warned:  “The clustering of financials in London is hugely efficient for all of Europe. Now you’re going to have a declustering which creates huge duplicate costs which is expensive to clients, but we have no choice.”
  Goldman Sachs CEO, Lloyd Blankfein, has highlighted the risks caused by uncertainty over the terms of the UK’s exit: “Without knowing how things will turn out we have to plan for a number of contingencies,” Mr Blankfein said about possible job losses. “If there is no period of time to implement whatever changes are brought about in a negotiation, we may have to do things prematurely and we may have to do a range of things as a precaution and take steps.”

Unsurprisingly, buyers are starting to sit on their hands and waiting to see what happens, as The Guardian reports:

“London estate agents have begun to offer free cars worth £18,000, stamp duty subsidies of £150,000, plus free iPads and Sonos sound systems to kickstart sales in the capital’s increasingly moribund property market. The once super-hot central London market has turned into a “burnt-out core.”

How much will prices fall, and how long will it take for prices to bottom?  These are now set to become the key questions at London dinner-parties.  Logic suggests prices will need to fall at least 50% to bring them back to more affordable levels.  And the pain is likely to stretch out over years, as leading buying agent, Henry Pryor, has warned:

In my 28 years in the property business, we have done this twice before, and each time it takes around five to seven years before things recover.”

We must all hope that May will use her potential landslide election win to quickly reverse her recent rhetoric, and return to the common sense positions she staked out before the Referendum.  It is not too late for her to agree to remain in the Single Market, the Customs Union and accept the jurisdiction of the European Court of Justice.

Without such a move, London home owners will face a perfect storm as the financial services industry “de-clusters” to Frankfurt, Paris, Brussels, Dublin and Amsterdam next year.

 

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