Prime London home prices (Mayfair, Kensington, Belgravia, Chelsea) are now down 20% from their pre-Brexit peaks. Theresa May’s general election gamble and the surprising success of the Labour Party under Jeremy Corbyn has negatively impacted foreign investor sentiment, despite ‘cheap’ sterling exchange rates against the US dollar, euro, Russian rouble and Asian currencies. The fall in sterling has also led to a rise in petrol and food prices in Britain, historically the most inflation-prone economy in Western Europe. This means high street consumer spending falls even as the Bank of England rate hikes bite into floating rate home mortgage costs. The property market, at least at its ultra-luxury, multimillion pound prime central London segment, has priced in hard Brexit, higher populist inspired ‘mansion taxes’ and the end of the offshore buying boom.
It does not surprise me that UK property transactions fell 10% in the last quarter of 2017 even as the dramatic fall in sterling should have attracted frenzied bottom fishing from abroad, as happened after the money market Armageddon of 2008. European buyers are reluctant to buy in central London now that immigration has become a toxic political issue in both Westminster and Brussels. Rental yields have not risen as both rents and values have fallen in unison. The hottest property market in the sceptered isle is not in central London but in the affluent micro-markets of Bristol, Manchester, Leeds and the Kentish coast. King’s Cross has been a transformation hub since Victorian times and is now the biggest property development site in Britain since Canary Wharf in the 1980s.
Now that Mrs May has invoked Article 50 and lost her Conservative MP majority in the June 2017 general election, the grim tone of the negotiations will not excite confidence in homeowners and investors. Every friend I know in the UAE who invests in luxury London flats is negative about the outcome of the Brexit negotiations, given the combative tone of both Eurocrats from Brussels and Eurosceptic Tory backbenchers. The new anger in the London working class after the Grenfell Tower fire tragedy and the emotional toll from the London Bridge/Westminster/Manchester terrorist assaults is also undermining confidence in the prime London market, as is the prospect of new ‘tax the rich’ stamp duty and ‘mansion taxes’. It is entirely possible that the bear market in London luxury housing will only get worse in 2018 and 2019 once the harsh reality of Brexit and successive rate hikes drive the UK economy into recession. The Brexit vote was Britain’s biggest economic own goal since the miners’ strikes bought down successive governments in the 1970s.
As inflation rises, consumer sentiment will plummet across the UK and insane affordability metrics mean the falls in home prices in some micro-markets will be draconian. For instance, I can easily see a 50% fall in the Nine Elms/Battersea new build flats as thousands of Asian and GCC speculators bought crazily expensive, cramped condos with no resale value on leverage from dubious developers (get killed while trying to make a killing in Manhattan on Thames ya habibi!) from Malaysia, China and the Gulf. Battersea/Nine Elms will be a graveyard for leveraged speculators in 2018.
Transaction volumes in London will fall as banks tighten mortgage loan underwriting protocols and Britain faces another bout of 1970s style ‘stagflation’. The dire current account deficit and angst over Brexit could trigger another global speculative run on sterling. High loan to value bank mortgages will become less easy to procure once interest rates and inflation rise.
2017 and even 2018 will be difficult for homeowners and investors as the macro shocks to the UK economy and housing market converge – inflation, sterling, the UK current account, immigration controls, higher tax duty, the rise of populist class warfare, a Labour Party resurgence. Gulf investors must brace for billions of dollars of losses in their UK property portfolios. The outlook for London commercial property is also dismal, as international banks downsize in the City and shift staff to Dublin, Frankfurt and Berlin.
