Is London's property market about to grind to a halt?

A slump in the pound could slow down the market.

London estate agents do not lose a minute pumping out press releases in reaction to new laws or regulations that appear in some way to threaten their business.

The format for these releases is always the same: when the new law is proposed, the agents cry in agony that it cannot possibly be allowed to happen because it will destroy the property market. Then when it does happen, they put out another set of press releases claiming it really won’t make much difference after all and that the party can go on.
So it was with the EU’s campaign to slash bank bonuses. When first mooted, this was portrayed as a measure that would destroy the London market. According to figures from Savills, 52 per cent of the money that goes into the prime central London property market and 62 per cent of the money that goes into the south-west London market for houses worth £2 million and above originates in the bonus packet of somebody who works in the financial sector.

That is an awful lot of money. Take it away and you would have an awful lot of unsold properties. But now that the bonus cap has made it into EU law — the European Commission to include in its Capital Requirements Directive a clause limiting bank employees to a bonus of no more than 100 per cent of their annual salary, or 200 per cent if they receive special permission from their shareholders — the well-groomed Ruperts and Samanthas who make their living selling top-end properties don’t seem too bothered.

They have a point. As with so much the EU does, there is a gaping hole in the proposal to limit the size of bank bonuses: it doesn’t say anything about limiting salaries. Rich people are in the habit of employing brainy accountants to pick at loopholes, but in this case there doesn’t seem to be much need to spend a great deal on accountants’ fees. Why not just take your bonus in twelve monthly instalments and call it a salary rise instead? Logically, banks will move to a model of remuneration based around annually renegotiated salaries.

What is potentially more damaging is the banks’ own decision to cut their remuneration pools. Bonuses have already fallen sharply — by 9 per cent last year. As they did, so buyers in the prime central London market became increasingly reliant on borrowed money.

According to Cluttons, 74 per cent of buyers bought with a mortgage in 2012, up from 49 per cent in 2011. Perversely, the EU’s rules might actually make it easier for some bankers to buy high-end properties. If it leads to an increase in salaries to compensate for a decrease in bonuses, it might make it easier for bankers to persuade lenders to give them large mortgages, the assumption being, rightly or wrongly, that while a bonus is a one-off, a higher salary will go on year after year.

If I made my money selling London property, the other thing which would worry me is the slide in sterling. Over the past decade, the prime London market has become ever more reliant on foreign money. One estate agent in Mayfair claims not to have sold a single property to a Briton since 2005.

Developers of London apartment blocks no longer bother hawking their wares to British buyers, instead folding up the plans and taking them to roadshows in Singapore and Hong Kong. Buyers from those two countries accounted for 23 per cent and 16 per cent respectively of all new building sales in central London, according to Knight Frank.

Thanks to their interest, property prices in London rose by an average of more than 7 per cent last year. If that seems a good return — certainly compared with property outside London — it has to be remembered that the dynamics of the British property market are quite different from the perspective of an overseas buyer. If you are out in Singapore, that 7 per cent profit has been almost completely wiped out by the slide in the value of the pound, which a year ago was trading at over two Singapore dollars but is now down to 1.87.

If you are expecting the pound to slide, it makes no sense to invest in London property. When it slumped in 2008, London property prices sank sharply with it. Now that expectations are forming once more that the pound will sink some way into the future, overseas investors have a double incentive to bail out of the market. If fellow overseas investors lose interest in London’s new-build market, it is hard to see how frothy prices can be sustained. Falling prices, compounded with a currency loss, could make a very nasty dent in their investment.

To which, inevitably, the estate agents have an answer: the London property market, they say, holds more attractions than simply financial gain. London is a pleasant and safe environment in which to live and own property. The world’s wealthy feel at home in London. Of all property hotspots, it is the one where you can feel most secure that your apartment will not suffer collateral damage from tanks rolling down the streets.
Perhaps, but I can’t help thinking that the promise of capital gains comes into the calculations, too. If you were especially keen to live somewhere but were convinced that the value of the property there was going to fall, you might just be minded to rent instead.

The boom in top-end London property over the past four years has been stoked partially by quantitative easing — printing money, to you and me. That has kept asset values pumped up. But you can’t keep inflating a market without consequences, and the debasement of the currency is ultimately undermining the value of investments made by overseas investors. Property might still be preferable to cash in many ways, but if you want an inflation-proof asset it is better still to have one you can at least stuff into a bag and take out of a country with a soft currency.

Photograph: Getty Images

Ross Clark is the author of How to Solve It, which is published by Harriman House (harriman-house.com)

Photo: Getty
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Who will win in Stoke-on-Trent?

Labour are the favourites, but they could fall victim to a shock in the Midlands constituency.  

The resignation of Tristram Hunt as MP for Stoke-on-Central has triggered a by-election in the safe Labour seat of Stoke on Trent Central. That had Westminster speculating about the possibility of a victory for Ukip, which only intensified once Paul Nuttall, the party’s leader, was installed as the candidate.

If Nuttall’s message that the Labour Party has lost touch with its small-town and post-industrial heartlands is going to pay dividends at the ballot box, there can hardly be a better set of circumstances than this: the sitting MP has quit to take up a well-paid job in London, and although  the overwhelming majority of Labour MPs voted to block Brexit, the well-advertised divisions in that party over the vote should help Ukip.

But Labour started with a solid lead – it is always more useful to talk about percentages, not raw vote totals – of 16 points in 2015, with the two parties of the right effectively tied in second and third place. Just 33 votes separated Ukip in second from the third-placed Conservatives.

There was a possible – but narrow – path to victory for Ukip that involved swallowing up the Conservative vote, while Labour shed votes in three directions: to the Liberal Democrats, to Ukip, and to abstention.

But as I wrote at the start of the contest, Ukip were, in my view, overwritten in their chances of winning the seat. We talk a lot about Labour’s problem appealing to “aspirational” voters in Westminster, but less covered, and equally important, is Ukip’s aspiration problem.

For some people, a vote for Ukip is effectively a declaration that you live in a dump. You can have an interesting debate about whether it was particularly sympathetic of Ken Clarke to brand that party’s voters as “elderly male people who have had disappointing lives”, but that view is not just confined to pro-European Conservatives. A great number of people, in Stoke and elsewhere, who are sympathetic to Ukip’s positions on immigration, international development and the European Union also think that voting Ukip is for losers.

That always made making inroads into the Conservative vote harder than it looks. At the risk of looking very, very foolish in six days time, I found it difficult to imagine why Tory voters in Hanley would take the risk of voting Ukip. As I wrote when Nuttall announced his candidacy, the Conservatives were, in my view, a bigger threat to Labour than Ukip.

Under Theresa May, almost every move the party has made has been designed around making inroads into the Ukip vote and that part of the Labour vote that is sympathetic to Ukip. If the polls are to be believed, she’s succeeding nationally, though even on current polling, the Conservatives wouldn’t have enough to take Stoke on Trent Central.

Now Theresa May has made a visit to the constituency. Well, seeing as the government has a comfortable majority in the House of Commons, it’s not as if the Prime Minister needs to find time to visit the seat, particularly when there is another, easier battle down the road in the shape of the West Midlands mayoral election.

But one thing is certain: the Conservatives wouldn’t be sending May down if they thought that they were going to do worse than they did in 2015.

Parties can be wrong of course. The Conservatives knew that they had found a vulnerable spot in the last election as far as a Labour deal with the SNP was concerned. They thought that vulnerable spot was worth 15 to 20 seats. They gained 27 from the Liberal Democrats and a further eight from Labour.  Labour knew they would underperform public expectations and thought they’d end up with around 260 to 280 seats. They ended up with 232.

Nevertheless, Theresa May wouldn’t be coming down to Stoke if CCHQ thought that four days later, her party was going to finish fourth. And if the Conservatives don’t collapse, anyone betting on Ukip is liable to lose their shirt. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.