Why aren’t central London house prices falling?

Commercial property has fallen by 10-15% as a result of the credit crunch in little more than three months. The Stock market has fallen, with property and housebuilding shares halving from the market peak. Yet central London property had a fabulous year of price rises throughout 2007, and still there is no sign of major price weakness. In a credit crunch you would expect the very inflated central London residential market to fall as well.

There are reasons to worry about these prices:

1. They have become very high in relation to UK earnings. The central district prices rose by as much as 30% last year alone.
2. Mortgage approvals are down 40% this month
3. There are fears of City lay offs and lower bonuses
4. Non doms and overseas visitors are facing the threat of paying more tax, which could persuade some of them to sell up and leave.

So why has the market so far stayed high?

It is noticeable that there is a shortage of property on estate agents’ books in central London, and the volume of transactions has fallen considerably. It appears to be the case that the market is being held up by a shortage of supply for the following reasons:

1. Stamp duty at 4% is a very large tax on moving home. Someone with a three bedroom flat in the better postcodes would have to pay around £50,000 to £60,000 in Stamp duty to move, along with other fees of say £30,000. People think twice before spending more than a year’s salary on the costs of a move.
2. Councils will often give permission for a basement addition, a new floor in the roof, or for more space by pushing out the back wall. That is a cheaper option than moving. The large number of builders skips around shows this is an attractive option.
3. Whilst the Non doms tax is rumoured, the final details have not been worked out. Maybe Non doms hope the worst will not materialise, or maybe their UK lawyers and accountants are telling them to wait as there may be a way round the rules.
4. City redundancies have not yet shown up in overall unemployment figures, and City bonuses are still being paid on last year’s earnings before the crunch.
5. Home Information Packs have put off speculative sellers from testing the market, as they do not want to incur the costs.

Will these factors continue to protect the market? It seems unlikely, as house prices are very expensive, and the credit crunch would normally have an impact. Foreign money is important to maintaining the strength of prices in the best districts, and it is true that there is still plenty of cash in Asia and the Middle east. That’s why watching the Non doms tax developments is especially important. If the Non doms think the tax regime is still OK here, then expect the prices outside the top districts to fall first, as redundancies, fewer mortgages and lower bonuses have an impact.