Britain’s Housing Market – Transactions Collapse

By Graham Vanbergen – I worked in Britain’s property market when it was little more than a cottage industry in the early 1980’s. A large estate agent in those days had five branches. Soon after Thatcher’s ‘liberalisation’ of the financial markets took place with so-called ‘big bang’ in 1983, the housing market fundamentally changed. International banks flooded the market with mortgage products, they even bought up estate agents to catch the ‘seven ages of man’. They wanted to profit from birth, education, marriage, home buying, raising children, retirement and death. One company I worked for had 1100 branches by 1987. In September 1988 the housing market started a rapid descent and it wasn’t for another six years before prices started to rise again.

The conditions for that rapid fall were much the same then as now.

SAT 05 NOV 1988 – The Times – House prices crumble
“The great house-price halt is under way and London and the South-East are in the vanguard. The Halifax Building society reports that prices in these regions did not rise during October, although house prices in other areas continued to rise.”

Today, the total housing stock in Britain is worth £6trillion, its highest ever and rose £385bn last year alone. Net mortgage debt is now 2.7 times total GDP, its highest ever. The private rented sector has exploded 55 percent in five years, its fastest ever. The London property market is now valued at one quarter of the entire nation’s housing stock – its highest ever. Just 26 percent of homes accounts for 45 percent of overall value. The growth in house prices across the nation rose at its fastest ever over the last three years and added £1.2 trillion to the total value.

What could go wrong?

Most property pundits will tell you that rising house prices is down to the huge demand in the UK as a result of an expanding population and low build rates, so house prices can’t ever really fall. This is nonsense. The reason, and the only reason, that house prices have not collapsed in Britain as they are currently doing in, say, Vancouver,  Hong Kong, San Fransisco  and many major cities around the world is because the government has not allowed them to. For all the so-called fundamentals, the Conservative government have heavily interfered with the property market to prop it up.

Apart from forcing bank base rates to the lowest since 1694, the first bogus house price escalation scheme was ‘Funding for Lending’ in 2012. It was an Osborne device to force banks and building societies to lend to the ‘real economy. Masquerading as a small business scheme that dramatically achieved….nothing, but did wonders at lowering mortgages rates – again.

‘Help To Buy’ was Osborne’s next market-distorting scheme that effectively forced the already overcommitted taxpayer to underwrite £12 billion of mortgage lending to people who hadn’t got an adequate deposit of their own, or who lack the income to have a go at producing one and who therefore shouldn’t really qualify for a mortgage at all.

If that wasn’t enough, Osborne then cooked up a new house price growth scam that allowed first-time buyers aged over 16 save into an Isa. The government will pay £50 for every £200 saved if it is used as deposit. Forget the £2 billion cost to the taxpayer – again. Also forget that as widely reported a few weeks ago that the Treasury and banks could face legal action over Help to Buy Isa’s as it is beyond doubt that the Government misled the public. The Independent reported that” All those young people saving in the hope of getting on the property ladder – the very people the Government claims to be helping – ‘have every right to feel conned and let down’.

On top of that, government pressure was put on the banks and building societies to hold off on repossessions from 2008 onwards.  So while default rates look lower than usual in this rather deformed cycle, hundreds of thousands of home owners moved (voluntarily or not) from repayment mortgages to interest-only mortgages – many started that way and have never paid a penny off the loan.

In an age of easy credit, British households are taking on new debt at a pace not seen since just before the big crash in 2008, new figures reveal. People are buying cars like never before, credit card debt is soaring and average mortgages have increased.

The scale of international money laundering washed through British banks, their offshore tax havens and shell companies was distorting house prices throughout the land, all sanctioned by an apathetic political class, reaping the rewards of doing … nothing about it.

Brexit has caused the currency to devalue by about 20 percent, inevitably, inflation will rise. If inflation takes a grip, and it may well do, interest rates could increase to combat its dark forces. In April this year economists were predicting a bank base rate of less than 0.5 percent until 2021. They may well prove to be wrong – as usual.

In the meantime, the IMF has cut its UK 2017 growth forecast to 1.3 percent. Given their historical prediction accuracy rate of accuracy of … zero percent, you can bet your kids university fund it won’t hit even that.

With the threat of rising inflation and interest rates to follow and no doubt wages not keeping up (as usual), you can see why no-one would want to take on a mortgage or increase the one they have. Net effect: No transactions.

And the housing market is showing all the signs of a downward trend starting as ever in London only to spread in a delayed reaction typical of a UK wide bubble bursting. Market sentiment has always trumped the fundamentals. The government, with all their financial devices are about to wonder what they did, that everyone else will have to pay for. Confidence is leaving the housing market and with it the numbers are crashing.

Over the last twelve months, just over 68,000 property transactions took place or 5,677 units per month in London. In the last 3 months that number plummeted to 2,589 a month, a collapse of well over 50%. In West Berkshire, my own home county, transactions have fallen by the same amount. Further analysis shows that in England there were 697,000 units transacted or 174,250 for each quarter, but the last quarter result was 94,823 – a near on 46% reduction in volume transactions.

Estate Agents in London are reporting property price falls all over the capital with price declines of around 1% a month over the last three months. Some particular areas were quite badly hit though. The Guardian reported that “Postcodes stretching west from Mayfair through Hammersmith and Chiswick saw prices fall by an extraordinary 12.9% on the month (July) alone, while in north London, prices plummeted by 9.3%, knocking £60,000 off the average home.” It went on to say “Economists at Société Générale have said London prices could fall by 30% and halve in the most expensive boroughs. Foxtons and other estate agents have warned that business has slowed sharply.”

The number of private investors piling money into the buy-to-let business has collapsed with landlords registering 46% less properties this year than the previous year – 19% down in July alone.

The Guardian has also just reported that “Sales (transactions) of luxury London properties collapsed by 86% in the past year” blaming billionaires and new taxes for a fall of nearly 20% in average prices in ultra-expensive homes in the capital. The same report mentions that “the reduction in super-prime activity in the last three months alone meant the government could face a £45m fall in stamp duty receipts.” That’s what happens when the government intervenes.

Property prices in London are broadly about 50% higher than at the peak of the crash in 2008 – something is bound to give. As a foreign investor, the fall in the pound means that cashing in will cost an extra 20 percent because of the devaluation in currency.

Much of the price fall reports are blaming Brexit, which as a reason on its own is nonsense. It is the culmination of a number of factors and Brexit is just one of them. The world economy is also slowing down just to add more complexity.

First time buyers in Britain have given up on the dream of owning their own home and now don’t bother saving for one. Taxes imposed at the upper end of the market by George Osborne to appease those complaining of ever higher property prices have taken a toll meaning both ends of the market to British residents have seized up.

Britain’s construction industry also suffered its sharpest downturn in seven years in July, according to a business survey published by Reuters with the National Institute of Economic and Social Research saying it saw a 50 percent chance of recession by the end of next year.

We are told there is a housing crisis due to a lack of affordable house building. But the builders won’t build because they know the buyers have dried up.

In yet another intervention into the property market, the new Chancellor Philip Hammond, has promised to buy up £5billion worth of unsold homes. The government somehow can’t see the irony. They have deliberately stimulated a market to such an extent that the local population can’t afford it, then end up buying the market to underwrite the builders when they can’t sell them.

Under the terrible stewardship of the previous Chancellor, many ordinary people would quite rightly be asking the government how on earth they plan to raise £5 billion having forced an array of austerity measures that has included; 150,000 pensioners who have lost access to vital basic services (such as help with washing and dressing), 8 percent cut in child protection services (equivalent to £600 per child referred), £18bn cut to local authority budgets – an average cut of 19 percent forcing child centre funding cuts of 28 percent. The list goes on; council waste services, environmental regulations, etc, etc. To emphasis the point, the FT reported that “in 2009-10, council inspectors in England made 56,175 visits to local factories and other workplaces to ensure health and safety rules were being followed and employee health safeguarded. By 2013-14, the number had been slashed by 91 per cent.” All this in a backdrop of mass tax evasion by wealthy individuals and corporations.

In the meantime, commercial property funds in the UK are being decimated with many suspending trading to save them from collapse. The FT reported that “One US private equity firm is preparing to spend more than £1bn on ‘discounted’ UK real estate in the next six to 18 months including buildings from a series of property funds that suspended trading.”

MarketWatch reported that: “Canada Life, Columbia Threadneedle and Henderson Global Investors announced they had halted redemptions in their U.K. commercial property funds. This comes after M&G Investments joined Aviva AV and Standard Life in announcing a temporary suspension of trading in shares of its open-ended property fund.”

The fundamentals may not have changed – sentiment definitely has.

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