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Sunday, August 17, 2008

Home Prices in London Fall 5.3% in One Month

The real estate recession has arrived, with a vengeance, in London and environs. While fading prospects for City employment and pay levels is no doubt part of the equation, the proximate cause is the dearth of mortgage finance, which bodes ill for the market’s prospects. Indeed, the headline item reflects a drop in asking prices, which signals new realism among sellers. But will buyers deem even this sort of concession to be adequate? From the Guardian:

Asking prices in London fell 5.3% in August, according to the Rightmove house price survey – equivalent to a £21,000 drop in a single month. Prices in some of the most sought-after suburbs are falling much lower. The average asking price in Wandsworth fell from £522,000 to £481,000 in a single month – or 7.9%. Homes in Brent, Kingston-upon-Thames, Richmond-upon-Thames and Greenwich were down more than 6.5%.

Nationwide, asking prices tumbled by a record 2.3% in August….Miles Shipside, commercial director of Rightmove, said: “The lack of mortgage finance is central to the problem…”…

The new survey adds to the mounting pile of gloomy housing market data. The Ministry of Justice said last week that the number of homeowners in England and Wales facing repossession rose to 28,568 in the three months to the end of June…That is 24% more than in the same period a year ago and the highest since the third quarter of 1992…

Property sales by Britain’s estate agents are also down 40% on a year ago, the Royal Institution of Chartered Surveyors said last week. Rightmove said the average unsold stock of property per estate agency rose for the seventh consecutive month, to a new record of 78 – up from 77 last month.

Shipside said: “The number of transactions this year is in danger of being the lowest since 1959.”

The Telegraph give another vantage on the deteriorating real estate market in “Savills: Residential building land value drops 20pc“:

Residential building land, one of the core assets of most housebuilders, plummeted in value by 20pc in the first six months of the year and could fall by up to 50pc before the current slump is over.

Research by estate agent Savills shows the value of brownfield sites, down 19.8pc, and greenfield sites, down 22.5pc, fell by roughly four times the rate of the housing market as investors deserted the sector.

Savills’ director of research, Yolande Barnes, said: “There are two ways that falling land values affect housebuilders. The first is in pushing down share prices, but the more worrying issue is for those that are heavily indebted and are under pressure from their banks to repay debt.

“At the moment you have to sell development land at fire-sale prices.”

Topics: Credit markets, Real estate

Email This Post Email This Post Posted by Yves Smith at 8:40 pm

8 Comments » Links to this post

8 Comments:

  • Anonymous says:
    August 17, 2008 at 8:56 pm

    Not relevant to this story but perhaps Yves could look into. It seems the American consumer is becoming an indentured servant to the
    ruling class. This is chilling.

    “Price-Fixing Makes Comeback After Supreme Court Ruling” -WSJ (today)

  • Anonymous says:
    August 17, 2008 at 11:43 pm

    Who is sitting with large exposures to UK mortgages?

    Did the UK have similar exotics as Neg-Am or was theirs mostly vanilla ARMs?

  • Ginger Yellow says:
    August 18, 2008 at 4:40 am

    “Did the UK have similar exotics as Neg-Am or was theirs mostly vanilla ARMs?”

    I don’t know of any neg-ams in the UK, but there may have been some niche lenders who used them. Even non-conforming mortgages were slightly less “toxic” than in the US, because the entire origination chain was regulated from 2004, including an obligation to check the affordability of the mortgage. Now, there were still self-certified loans and a lot of high risk products, and many are performing pretty badly, but I think the UK avoided the worst excesses of US-style underwriting in 06/07.

    As for who has big exposures, the big high street banks didn’t really do much if any direct subprime lending – it was almost all niche lenders owned by investment banks or building societies. Almost all of those loans, however, were securitised and lots of the resulting bonds ended up in SIVs, which are now back on bank balance sheets. Because the UK has recent experience of 30% house price declines, the securitisations were rated and structured a bit more sensibly than subprime RMBS in the US, so even the worst performing bonds (which usually have an interest rate mismatch contributing to their poor performance) don’t look bad at the senior level. Prime deals would have to see enormous house price declines and stratospheric foreclosure rates to suffer a loss. A recentish study showed that a hypothetical 2007 vintage prime RMBS would not default at the senior level even with 80% foreclosure rates and a 16% house price decline.

  • Phil Armstrong says:
    August 18, 2008 at 4:50 am

    Generally, the UK didn’t do neg-am mortgages. What they tended to do instead was short term (2-3 year) fixes which the borrower would expect to refinance at the expiry of the fixed term. Of course, post credit-crunch many of them can’t do this, so they end up on the banks ’standard variable rate’ which is usually 1-2% above the base rate. For many borrowers this means a huge payment shock: monthly payment increases of 40% or more in some cases. Expect default rates to soar in the near future.

  • leftback says:
    August 18, 2008 at 1:13 pm

    £500,000? Wandsworth is an absolute hole.

    The prices in Wandsworth should tell you something about the extent of the UK housing bubble. I mean, this is worse than $1 million studios in Manhattan.

  • Ginger Yellow says:
    August 20, 2008 at 4:42 am

    Wandsworth isn’t a hole. It’s got terrible transport links (considering its location) and the roundabout is an abomination, but the town centre itself is pretty nice. And it’s very close to very posh bits of London, so you can kind of understand why prices are high (not saying they are justified on the fundamentals).

  • Anonymous says:
    August 20, 2008 at 10:24 am

    Let’s see, 418,000 is still 10.45 times my household’s income, and we’re near to the top end of the 2nd quintile of *all* UK households (http://www.statistics.gov.uk/cci/nugget.asp?id=334). That should tell you something about how insane the British housing market has been.

    Although I feel sorry for friends who bought near the top (we’re in our mid-30s and people wanted to settle down), they’re mostly in it for the long haul and so are unlikely to suffer the worst of negative equity. I’m not sure that the same can be said for buy-to-let landlords and more stressed buyers who were getting 100% mortgages at 9-10 times income (you can’t even get these now).

    I’d have thought that some of the worst pain is still to come for people whose mortgages move from fixed to variable rate in the next 6 to 18 months since their repayments will rocket. Inflation seems unlikely to come down any time soon, though with petrol dropping the rate of increase may ease a bit.

    Wandsworth isn’t a hole, but it’s certainly not worth anything like USD 1 million per home! The closest analogy I can come up with is paying the same amount for a ‘fixer upper’ in Red Hook, over in Brooklyn — it’s not that far as the crow flies, but it’s not exactly easy to get to either.

    Like many first-time buyers, I’m going to wait a bit more before I start seriously thinking of committing to *anything* in this market.

  • Ginger Yellow says:
    August 20, 2008 at 10:40 am

    “Let’s see, 418,000 is still 10.45 times my household’s income, and we’re near to the top end of the 2nd quintile of *all* UK households (http://www.statistics.gov.uk/cci/nugget.asp?id=334). That should tell you something about how insane the British housing market has been.”

    Again, not to defend UK house prices, which are and were obviously seriously overvalued relative to income, but you’re painting a slightly misleading picture. The median salary for individuals in London is roughly the same as the average household income elsewhere. So for a household with two earners in decent jobs, £418k isn’t quite as bad as it sounds. Wandsworth Town is a very middle class area these days (I know one couple who bought a flat there a couple of years ago, and they’re neither rich nor overstretched by the mortgage).

    That said, it is extraordinarily difficult for first time buyers without some kind of external support.

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