There is a view that prime London house prices are immune from the credit crunch, that they’ll keep going up regardless of falling City bonuses and employment, regardless of fast-rising mortgage rates, and regardless of falling prices in the rest of the country.
I had lunch last week with Naomi Heaton, CEO of London Central Portfolio (LCP), a company which sources and then lets out central London for investors and also runs a fund which does the same. She’s totally convinced of the merits of the strategy. She has reams of data to back up her view: she had an analyst with her and they told me all about how there is a supply shortage; how the Olympics will push up demand across the board in London; how prices double every five to 10 years; and how the corporate letting market will ensure that there is always strong demand for prime rental accommodation. It’s convincing stuff and I did listen carefully to every word she said. But in the end I’m afraid that only one number stuck in my head, 3.2%. That’s the net yield on the properties Naomi sources. It’s also more than 2% below the base rate and at least 3% below the price of the average buy-to-let mortgage.
The bulls (all of them estate agents of one sort or another) argue that this doesn’t matter. And to back up their thoughts they all use one version or another of what we can call the ‘stupid foreigner’ theory. This has it that the newly rich Russians, hedge fund manager Europeans, oil-swamped Saudis and Chinese in general, all love London and prime London property in particular so much they’ll keep buying, and at any price. That will keep buyer demand up at the same time as thousands of other foreigners – sent here by their rich employers – will keep competing for rental property, hence keeping yields up.
I don’t buy any of this. Being foreign doesn’t make you an idiot (quite the opposite it seems); it doesn’t make you blind to bad value or ignorant of the historical relationship between property yields and interest rates (it’s normal for the former to be greater than the latter); it doesn’t make you likely to buy into a market locals are shunning; and it most certainly doesn’t make you immune from credit crunches or global economic slowdowns. If the corporate letting market was as healthy as we are told, yields would be a hell of a lot higher than 3.2% and Paddington Basin wouldn’t be a desert. And if foreigners were stupid London house prices wouldn’t have fallen 0.6% in October. But, say Land Registry figures, they did.
France also suffers from a dearth of demand
Of course it isn’t just the prime London market that’s seeing a dearth of demand. The same problems have hit France. I spent the weekend at my mother’s. She’s selling a fabulous old bastide in the Midi Pyrenees an hour from the sea and an hour from the ski slopes. It’s got seven bedrooms, five bathrooms and endless reception rooms. It’s got a pool. It’s got outbuildings (all buyers love outbuildings). It’s got a pool and its own river running through its 150 acres of land. And it is set in its own totally private valley.
But despite it being on the market for over eight months and yours for a mere million euros she’s not had a single offer – she hasn’t even had a viewing in the last six months. The market has just evaporated. According to local surveyors it’s the same the whole way down the scale: the English property fanatics who used to snap up anything and everything from €50,000 to €200,000 aren’t buying any more, presumably because they can no longer remortgage their UK houses to do so. And nor is anyone else. It’s lucky my mother quite likes her house: I suspect she’s going to be living in it for some time to come.