London’s property: As unsafe as houses

 
Philip Salter
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INSANITY, Albert Einstein famously said, is “doing the same thing over and over again and expecting different results.” The crash might have petrified property investors at the bottom and middle of the market, but in London’s swankier postcodes prices are back on the up. The question is whether these represent sound long-term investments or another credit-crazed bubble?

At the top of the market prices have held up well. Anxious investors, blown westward by the Eurozone’s rolling crises, have settled upon the capital’s most luxurious houses with an eye to preserving their wealth. The sustained depreciation of sterling has made this move increasingly attractive. But according to James Wyatt, head of valuation and surveying at John D Wood & Co, wealthy Londoners have also continued buying: “London is relatively protected due to quantitative easing, which has re-flated the stockmarket and led to bonuses entering the property market”.

The announcement in the budget that properties sold for more than £2m will be subject to a new 7 per cent stamp duty charge could go some way to denting this market; and if – or more likely when – the Eurozone’s member states are forced to face up to the dissolution of their currency block, the impact would be felt across the channel. In the latest of its reports on the UK housing market, Capital Economics notes that despite tighter market conditions in London suggesting resilience in the capital’s house prices over the course of this year, over the next few years valuations suggest London is due a period of underperformance. The report states: “One spur could be a further financial market shock, triggered by renewed fears of a Eurozone break-up. That would hit London’s economy harder than other regions.” According to Martin Stewart, director of the mortgage broker London Money, this is already happening: “Right now, Eurozone woes are driving up rates in the wholesale markets, which is translating into standard variable rate rises back home. That’s not good for prices.”

LOCATION MATTERS
Despite the headwinds, many in the property business remain broadly optimistic. Stewart thinks “London house prices aren’t going to go the way of prices in the rest of the UK.” He says “the capital has a unique microclimate of strong demand, weak supply and above average earnings – it’s by no means immune to the vagaries of the market, but it’s far more resilient.” Hugh Wade-Jones, director of Enness Private Clients thinks “London prices are bullet-proof at the moment and there is no sign of increases abating.”

Whether the property bulls are proved right or wrong, there’s one thing everyone can agree on – when it comes to property prices, location matters.

Kristjan Byfield of Base Property Specialists explains: “London is a complex market, made up of micro-markets – areas can quickly become fashionable, while others fall out of favour. Also, because there’s no more space to build in London, major regeneration projects, such as Stratford, King’s Cross and Elephant & Castle can have a dramatic effect on local house prices.” Picking a winning area could be a gamble, but the jackpot could be huge. Because of the risks, Steven Bond of Beresfords says “investors must feel comfortable that they can service any debt and retain a back up kitty for rises in mortgage repayments and repairs.” He thinks “stretching to an absolute maximum is not a good idea.”