House prices: the London crash, the UK temperature and the danger overseas

House prices are crashing in London, will the fall extend to the rest of the UK? And what about further afield, much further afield?

Article updated: 25 January 2019 1:00pm Author: Michael Baxter

House prices in London fell 0.8 per cent year on year in the latest quarter, or so stats from the Nationwide say. I would describe that as a mild drop, not so much as a crash as tiptoeing in traffic.

Rightmove, which tracks asking prices, recorded a bigger fall — down 1.2 per cent, year on year in the latest month, with the South East recording an even bigger drop — 1.8 per cent.
But in some areas it is much worse. Anecdotal evidence suggests that property in areas such as Chelsea, Fulham, or Kensington is being sold for 25 per cent or even more off the asking price.

Some reports suggest falls are even greater for the more expensive properties.


The latest Residential Market Survey from the Royal Institution of Chartered Surveyors is pointing down.

The headline index, taken from the percentage difference in the number of surveyors reporting rises and the percentage number reporting falls, dropped to minus 17 in December, the lowest reading since 2012.

But the RICS index is distorted by what is happening in London and the South East.
A reading of minus 17 is not good, but neither does it foretell doom.

I have always highly rated this index. It is not only a superb bellwether of the UK housing market, but it is not a bad measure of the UK economy. In the past, whenever the index has slumped into deeply negative territory, the UK economy has tended to slow sharply a few months later. Whenever the index has soared into high positive numbers, then a few months later the UK economy tends to perform well.

But the index isn’t into deeply negative territory. In April of 2008, for example this index fell to minus 94.7. In October 2010, it dropped to minus 49. I am not yet predicting a housing crash because the index has not fallen low enough. And for the same reason I am not yet forecasting economic crisis ahead, not based on this reading, anyway.

But the RICS survey tracks other indicators too. And they are simply confirming something that I think we all realise, both demand and supply is extremely low. Under such circumstances, it only takes a modest change in demand, up or down, to have a massive impact on house prices.

Residential Market Survey, headline index. Source: RICS

The wealthy are feeling it

And while the London market and pockets of the South East are struggling, the areas that are especially badly hit are where the especially wealthy live.

Usually, swings in the UK housing market have their beginnings in London and the South East. In the crash of the late 1980s and early 1990s, it all began in London and the South East in 1989. I can tell you that from personal experience, I had a one bedroom flat in a beautiful area of Brighton which I could not sell. The wider falls did not reach the country as a whole until a couple of years into the ‘90s. The recovery began in London and the South East too, several years after the 1990s boom began, there were still properties in the north with negative equity.

The crash of 2007/2008 and subsequent recovery followed a similar trajectory.

If the experience of the last 25 years holds any relevance, it is that the current bear market in London and the South East will spread. At which point the RICS index will fall very low indeed.

Is it different this time?

Maybe it is different this time. Maybe we are simply witnessing a one-off hit on the wealthier areas.

Actually, for all the Brexit nonsense, some of the economic fundamentals are good. Inflation is down to 2.1 per cent, core inflation (minus one-offs including, food, energy and tobacco) is down to 1.9 per cent.

Wages rose by 3.2 per cent in November. Unemployment is at just 4.0 per cent. Despite the woes on the High Street, the labour market has very little slack, and yet there are no signs of inflationary pressure. This in turn means UK interest rates are not likely to go up much, maybe increasing from the current absurdly low level of 0.75 per cent, peaking at a still very low level of around 1.25 per cent.

In the event of an especially nonsensical hard Brexit, things might deteriorate, but right now, the combination of rising real wages and a continuation of ultra low interest rates should be enough to stop a crash.

Looking beyond these shores

There is another way of looking at it all. And that it to look at average house prices to earnings and compare this to the average over the last twenty years.

According to Capital Economics, in the UK, the ratio of price to income is 18 per cent over average.

In Australia it is 23 per cent over average, and 28 per cent over average in Sweden.

In New Zealand the ratio is 37 per cent over the 20 year average and in Canada it is 39 per cent over average.

But in Hong Kong, average house prices to average income is 71 per cent over average — that’s 71 per cent.

House prices have increased by 52 per cent in Hong Kong over the last five years. They also increased by more than 40 per cent in New Zealand and Sweden.

Interestingly, in Canada, over the last five years average house prices rose by just 10 per cent, the problem of overvalued property in Canada is an old problem.

If you fancy a game of property bubble watching, I would suggest you are spoilt for choice, but Hong Kong has a big enough bubble to create one mighty crash.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

See what else we have to say