What is the biggest issue in London? I think, it is affordable housing issue for working class people. To get a secure, habitable, accessible (close to transports) house in London is a big issue. Although, Compare to many cities in the world, of course London is maybe the more secure and accessible (transport infra-structure is good) city, but perception among Londoner is not that much optimistic, as far as I see, from my experiences. In this text, i will explore the state of housing in London in terms of affordability for local, common people and try to answer question, if house prices in London will decrease or increase in 2012, given supply and demand parameters. And my conclusion is, it will decrease, but it won’t crash, yet. I will try to establish it in terms of demand/supply factors.
Foremost, I am not expert on real-estate properties. But last one year, I am doing my own research to find a suitable house in London, therefore, this text will be based on my own research and personal experiences. So, don’t forget to do your own research. I don’t work for any real estate related company or any whatsoever relation. I know, statistics, is white lies, but in order to justify my conclusion, I will use some statistics. Most of statistics in this text will be based on following publication from Local London Authority and Land Registry:
http://www.london.gov.uk/sites/default/files/Housing%20in%20London%20Dec11.pdf
http://www.landreg.gov.uk/upload/documents/HPI_Report_Nov_11_ws13pm4.pdf
I think housing issues is a timer bomb, waiting to explode. And at the moment, I cannot see a sound policy to address it, neither from local and governmental authorities agencies. They hope the issue resolves itself. Would it be resolved itself for common people in a free market capitalist economy, where rich foreigner can buy properties or it is open to migration?
In Maslow's hierarchy of needs, sheltering is at the bottom, among side of breathing, food, water, sleep, sex, excretion. People need a shelter, a home. That is very basic. We need a safe place to nurture. We either need to rent or buy house to live in. In some worst cases, some of us are forced to streets or squatting. Actually, because of current economic crisis, homeless people in London streets increase (around 4000 people in London streets, increased almost 33 % since economic crisis started in 2008).
According to statistics, in 2011, in London, 53 % of people own their house, from high of 57 % in 2001. Around 25% people in private or social rental and private rental is increasing.
So let’s we assume that you are one of these lucky person in London who has a job and afford to rent a place at least. Actually, most of these people prefer to buy a house rather than renting. Statistically, 85% of Londoners would prefer to buy a house. So, these people somehow have to save money to buy a house, if they are in rent.
Average house price in London in July 2011 was £347,000 which includes very expensive houses in exclusive places of London. In that text, since I am considering affordable house for Londoners, I assume average house price in London £250,000, which is actually of mean of house prices and also what I have observed since last year.
For a first time buyer, you need to provide at least %20 deposit for mortgage which is be around £50K. In addition, you need at least £5K for other services (mortgage, legal, surveyor, and I am not including %3 stamp duty tax for houses less than £250K). For someone, who would be saving £500 per month, it would take at least 10 years to make a 20% deposit which leads people to not save but spend, as it seems very long term investment. Given that people in UK are bombard to spend by capitalist system, rather than save, most people do not save, but enjoy today, rather than thinking tomorrow.
So, I think, most of first time buyer cannot afford to buy house because of restriction on mortgage. Therefore, in terms of first time buyer, demand is low.
There is also another type of buyers who prefers to work in London, but who do not prefer to live in London. They prefer to commute every day 2-3 hours than living in London. For example, some of my colleagues and friends, commutes from Brighton and Oxford (2-3 hours journey everyday), rather than to live in London. So, another low demand factor.
But, we have also foreigner factors in London in terms of demand. This factor, foreigner investing in London, buying houses in London, is one of the biggest factors in increase house prices in the last decade. Rich foreigner sees London as a safe place to invest. They think, they will make good profit. And actually they do. In exclusive neighbourhood in zone 1, house prices has increased almost 9% last year, but overall increase all over London was %1. So, simply, some rich people will invest in zone 1, but I wonder if they will invest in houses, in zone 2 or zone 3? For example Stratford which is going to host 2012 Olympics.
I doubt it. I don’t think, any rich foreigner will invest it in zones apart from Zone 1 or Zone 2. I was walking in Stratford last week, I noticed many empty flats. It seems not much demand for these new small flats which is built Olympics pipe dreams. For example, house prices in Newham (which holds Olympics and zone 3) has reduced 0.3% in the last year. Besides that, I don’t think, rich foreigner will see London as safe place while EU is in credit crisis. Remember the attitude of Chinese government regarding to buying EU zone debts? They refused it. They are not investing in EU as they do not have faith. Sure, UK and EU is not exactly same, but they have strong trading ties. I think, these rich people would invest more in emerging markets, such as Brazil, Turkey and Poland or Zone 1 in London. So rich foreigner investment won’t effect houses prices for common people who cannot afford to buy a house in Zone 1 or 2, they are already priced out in these zones.
Now let’s have a look at possible seller. Let starts with local Londoners, who bought house very long time ago and would like to sell it and leave the city. Actually, in 2011, net migration is negative. For example, between mid 2009 and 2010 11,200 more people moved out London than moving in. And I think, in 2011, that number has increased due to economic crisis. So that would increase housing supply.
Other type of people who would like to sell house are those who bought big houses before boom, and would like to sell now to make a profit and get a smaller or bigger places. That’s very common. Lately, a friend of mine sold his house to get a bigger place to settle down and have a family. And I read from many websites, people sells big houses to make profit and buy smaller and more affordable inner central places and invest house abroad. Since, these buys and sells kinda offset each other, in terms of demand and supply; they are negligible, if not increase the supply.
There is an emotional factor during selling and buying house prices. Many house owners feel that their house still worth as much as peak of 2007. For example, one of the house owners got very emotional once I did not offer as much as she thought so. After my discussion and email about my reasoning why it does not worth, she sliced her prices £15K (5% lesser), but it was still so high for that house. Statistically, in UK, average asking price of house is £236,597, but selling price is £168,205 according to land registry. That means almost 30% higher asking price and a very good negotiation (middle-eastern or Asian way) has to be done, as house owner expect very high.
Let’s have a look at also housing supply in London. In last 3-4 years, in average, around 25000 new house is delivered. A total of 40,870 affordable homes were delivered in the three years 2008/09 to 2010/11. As future, there are 172,000 homes in London with outstanding planning permission, of which just over a third are under construction. Most of these houses (55000) will be built in Greenwich, Tower Hamlets and Newham. Camden and Richmond and Kingston Upon Thames will have smallest new home, 550 and 1,200 home respectively . It is estimated that London population have grown by 71,600 between 2009 and 2010. That growth is attributed to mostly natural changes (birth, dead) . Therefore, delivered new houses (25000) are a bit short of demand due to population growth (71000) in long term, but for short term demand-supply is equal, if supply is not less.
As I mentioned above, most of the new house (almost third) will be built in Greenwich, Tower Hamlets and Newham area of London. These are the most deprived places of London. With Olympics 2012 and Royal Docks Enterprise Zone, Cross Rail and several private initiatives(for example Westfield shopping centre in Stratford), east London is getting attention. But Londoners emotional attitude towards these areas are very distant. West and North areas are still very popular. In that sense, to get people attention to the east, house prices must be lower; this is already lower compare to North and West London, in fact.
Although house prices in London have increased 1%, when you consider inflation, house prices are actually is going down. Royal Institution of Chartered Surveyors reckons that house prices will fail %3 in 2012. Given that house prices is still 40% higher than 2006, it will go further, I think. But the question is how much and longer? I don’t think, house prices would go so much down, as that would be disaster for so many people for whom bought house in peak times. According to Council of Mortgage Lenders, around 13% mortgages approved after 2005 is in negative equity, while house prices are down around 10% meanwhile. Therefore, government will take some action to make sure, house prices to stabilise otherwise they will have an issue in election.
So, government has a dilemma. House prices cannot go much down, in that case it will scare foreign investor and also many public will be in negative equity. Therefore, I reckon, government will use inflation to wipe out its debt and public dept. With higher inflation, house prices will decrease in real terms, like in 2011. Government will also control supply chain to make sure there is not much new houses.
Overall, I think, house prices will decrease in 2012, especially when you consider inflation. The factors increase house prices are: Low level of new houses compare to population growth, high renting prices and basic needs (people need a shelter). On other hand, I can count many factors which will decrease house prices: Already overprices, low level of mortgage approval for first time buyer, reluctant foreign investor, poor housing and habitation. But, I think, house prices won’t crash due to historical low level interest rate. Once interest rate starts soaring and people could not pay their mortgage, and repossessions start, supply will be higher and then we may see property crash. But policy makers won’t sit idle, they will come up with something, as public are very emotional with their house and many people see them also as a retirement investment.
