The London Bubble

[lastlaugh]

I'm not sure you are correct - 280k (from above) / 3.27M households = 8.5%

The impact of a rental crash from the HB cap only affects a potential maximum of 8.5% of london households and not all of these are over the 350/limit. Lets say 50% are (its a guess). so 4.25% of london is now vulnerable to the cap.

London is easily big and busy enough to absorb a 4.25% "crash" in rent.

Government has already done the sums and only a handful of landlords are going to be affected by the HB cut!

Hmm! I'm not sure I agree with your analysis. You are right that only 8.5% of London households are private tenants on HB. But that just explains why no-one cares and why the policy is going through without a fight. It doesn't say the impact will be light. What percentage of US households were sub-prime borrowers in 2007?

If you look through the other end of the telescope you might see a different story. Check out page 26 of this document from Shelter HB claimants make up at least 12% of private tenancies in EVERY London borough. Some boroughs the figure is as high as 85%!!! It is my opinion that HB has set a floor for rent over the last few years for all private tenancies. I can't prove this, but it can be observed that rent is fairly uniform across the entire city now and remarkably similar to HB rates (before the cut was introduced). And in areas where HB has pushed up rents it can be seen that house prices have quickly followed suit as the BTL brigade have plugged the numbers into their spreadsheets and bid up the cost of houses accordingly. It's why people on good salaries complain they can't afford a house in Hackney or Peckham anymore!

The HB cap is such that in some areas of London just about every tenancy granted in the last 5 years will exceed the local cap. In my area I would say at least 90% of advertised rentals in the last 5 years exceeded the current local CAP. That's a lot of naturally bullish, and therefore highly-leveraged, BTL tycoons whose business model has just collapsed.

[TrevorS]

Hmm! I'm not sure I agree with your analysis. You are right that only 8.5% of London households are private tenants on HB. But that just explains why no-one cares and why the policy is going through without a fight. It doesn't say the impact will be light. What percentage of US households were sub-prime borrowers in 2007?

If you look through the other end of the telescope you might see a different story. Check out page 26 of this document from Shelter HB claimants make up at least 12% of private tenancies in EVERY London borough. Some boroughs the figure is as high as 85%!!! It is my opinion that HB has set a floor for rent over the last few years for all private tenancies. I can't prove this, but it can be observed that rent is fairly uniform across the entire city now and remarkably similar to HB rates (before the cut was introduced). And in areas where HB has pushed up rents it can be seen that house prices have quickly followed suit as the BTL brigade have plugged the numbers into their spreadsheets and bid up the cost of houses accordingly. It's why people on good salaries complain they can't afford a house in Hackney or Peckham anymore!

The HB cap is such that in some areas of London just about every tenancy granted in the last 5 years will exceed the local cap. In my area I would say at least 90% of advertised rentals in the last 5 years exceeded the current local CAP. That's a lot of naturally bullish, and therefore highly-leveraged, BTL tycoons whose business model has just collapsed.

Something else I just realised. It was reported not long ago that the number of households renting in London has passed 50% (ONS: http://www.ons.gov.uk/ons/rel/census/2011-census-analysis/a-century-of-home-ownership-and-renting-in-england-and-wales/short-story-on-housing.html). But 25% of all London households are receiving HB. This means that an incredible 50% of all renter households in London receive HB!

Sorry my mind is boggling now and I can only think I've missed something somewhere, because if this is correct then even Boris, George, Dave and Ian must have realised this is bonkers?

[wheresitgoing]

its occurred to me that we are all wrong above - we are comparing the number of HB claimants with the number of dwellings but we dont know how many HB claimants are sharing a dwelling so we have been assuming that all each claimant has his or her own dwelling when of course its not the case.

[wheresitgoing]

The HB cap is such that in some areas of London just about every tenancy granted in the last 5 years will exceed the local cap. In my area I would say at least 90% of advertised rentals in the last 5 years exceeded the current local CAP. That's a lot of naturally bullish, and therefore highly-leveraged, BTL tycoons whose business model has just collapsed.

You make it sound like the TPTB want to rents to fall which would be a surprise given that its been the opposite todate,

I guess we'll soon see in a few months if the average rents fall in the capped areas only or just generally. .

[TrevorS]

its occurred to me that we are all wrong above - we are comparing the number of HB claimants with the number of dwellings but we dont know how many HB claimants are sharing a dwelling so we have been assuming that all each claimant has his or her own dwelling when of course its not the case.

From http://england.shelter.org.uk/get_advice/housing_benefit_and_local_housing_allowance/housing_benefit: "Only one person per household can claim housing benefit". The census and ONS report numbers are also for households. It really does look as if over half of all renters in London receive HB.

[TrevorS]

You make it sound like the TPTB want to rents to fall which would be a surprise given that its been the opposite todate,

I guess we'll soon see in a few months if the average rents fall in the capped areas only or just generally. .

TPTB want HB to fall. They appear unconcerned as to what happens with rents. Landlords can (and do) evict benefits tenants where they are no longer making an acceptable return, and replace them with non-benefits tenants quite easily as a whole due to the chronic housing shortage.

The evicted tenants are shipped out of London to the South coast and up North. In fact anywhere that rents are cheaper i.e. HB will be less. So HB can fall and London rents can nonetheless rise.

[TheCountOfNowhere]

Spent the weekend in London with some friends....ALL their chatter was about their house prices and what they were going to buy before 'they missed out with prices bound to rise'!!!!

One couple stated, we are going to offer full asking price on a bigger place but it's bound to sell for more"...then went on to state "we can't actually afford it" later on followed by..."my job is under threat".

[Dorkins]

Landlords can (and do) evict benefits tenants where they are no longer making an acceptable return, and replace them with non-benefits tenants quite easily as a whole due to the chronic housing shortage.

So HB can fall and London rents can nonetheless rise.

This argument doesn't work. If landlords can replace HB tenants with non-HB tenants paying higher rents, why haven't they already done it?

[Dorkins]

Spent the weekend in London with some friends....ALL their chatter was about their house prices and what they were going to buy before 'they missed out with prices bound to rise'!!!!

One couple stated, we are going to offer full asking price on a bigger place but it's bound to sell for more"...then went on to state "we can't actually afford it" later on followed by..."my job is under threat".

I've noticed that my older co-workers in London have again started prodding me about buying. I always just tell them that with my job contract finishing next year I don't know where I'll be working so need to stay flexible. I'd like them to figure out for themselves that London house prices are too high for ordinary workers who weren't gifted equity during the late 90s/2000s.

[TheCountOfNowhere]

I've come into work today to find out one of the other departments have been told they are loosing their jobs!!!

Another nail in the coffin of the london bubble.

[The Masked Tulip]

I've come into work today to find out one of the other departments have been told they are loosing their jobs!!!

Another nail in the coffin of the london bubble.

About how many? What type of job? Private or Public sector?

[Mrs Bear]

This argument doesn't work. If landlords can replace HB tenants with non-HB tenants paying higher rents, why haven't they already done it?

It would seem that a certain type of LL has deliberately targeted HB tenants - buying cheaper properties in scruffier areas and furnishing/renovating them with cheap, 'this'll do' fixtures etc.

Judging from many cases on HUTH, particularly oop North, you could always tell when this was the case - they knew to a penny what rent they could get - yields often high enough to have the presenters practically orgasmic.

[Bruce Banner]

I've come into work today to find out one of the other departments have been told they are loosing their jobs!!!

Another nail in the coffin of the london bubble.

What sector?

[Dr_Mibbles]

There are huge job losses in the City this year - UBS, Deutsche, Citi, and dozens of medium-sized banks have already announced planned mass layoffs (3000 in UBS alone!). 100,000 City jobs have been lost since 2008, and there is no sign of the job losses bottoming out.

The City bonus pool has shrunk to a 15-year low of £1.5bn. This has not been replaced with higher salaries for the vast majority, perhaps a few lucky individuals in the right jobs have managed to negotiate a higher salary to compensate. Most (95%) of people in Banking are employed at Analyst/Associate/VP level, paid 35-80k, and salaries in most banks are static, and there are very few lateral moves (which used to be the source of large payrises in the past).

Add to this the impact of the housing benefit cap as discussed above, and you have the perfect storm - there simply are not enough well paid people in London to fill all those thousands of £500pw small one-bed flats in mediocre areas of London, let alone 'prime' lettings.

Prices on prime lettings are falling. Yields have already fallen below 2% on prime, and are falling further, likely to go negative in the near future. The economic fundamentals of London do not support, in any way, the current bubble - stoked as it is by foreign investors buying off each other, in the deluded belief that the good times cannot end for London property. The whole thing is a house of cards, and the economic fundamentals have started rocking the very table it's build on.

But here's a really important point: All those super-wealthy individuals didn't start buying London property of their own accord, en masse, through some kind of bizarre co-incidence. No. They were advised by the Private Banking industry that London property was a safe port in a storm - buying London property became standard advice from Private Bankers to UHNW clients. Now, there is a volte-face taking place. The Private Banking industry and institutional investors know they're in dangerous bubble territory, with yields about to go negative. The bubble is surely about to pop in a dramatic way.

[The Masked Tulip]

But here's a really important point: All those super-wealthy individuals didn't start buying London property of their own accord, en masse, through some kind of bizarre co-incidence. No. They were advised by the Private Banking industry that London property was a safe port in a storm - buying London property became standard advice from Private Bankers to UHNW clients. Now, there is a volte-face taking place. The Private Banking industry and institutional investors know they're in dangerous bubble territory, with yields about to go negative. The bubble is surely about to pop in a dramatic way.

Thank you. Volte-face - I have learnt a new phrase today.

When you say that there is this change of direction by the above, on what evidence do you say that?

[koala_bear]

There are huge job losses in the City this year - UBS, Deutsche, Citi, and dozens of medium-sized banks have already announced planned mass layoffs (3000 in UBS alone!). 100,000 City jobs have been lost since 2008, and there is no sign of the job losses bottoming out.

The City bonus pool has shrunk to a 15-year low of £1.5bn. This has not been replaced with higher salaries for the vast majority, perhaps a few lucky individuals in the right jobs have managed to negotiate a higher salary to compensate. Most (95%) of people in Banking are employed at Analyst/Associate/VP level, paid 35-80k, and salaries in most banks are static, and there are very few lateral moves (which used to be the source of large payrises in the past).

Add to this the impact of the housing benefit cap as discussed above, and you have the perfect storm - there simply are not enough well paid people in London to fill all those thousands of £500pw small one-bed flats in mediocre areas of London, let alone 'prime' lettings.

Prices on prime lettings are falling. Yields have already fallen below 2% on prime, and are falling further, likely to go negative in the near future. The economic fundamentals of London do not support, in any way, the current bubble - stoked as it is by foreign investors buying off each other, in the deluded belief that the good times cannot end for London property. The whole thing is a house of cards, and the economic fundamentals have started rocking the very table it's build on.

But here's a really important point: All those super-wealthy individuals didn't start buying London property of their own accord, en masse, through some kind of bizarre co-incidence. No. They were advised by the Private Banking industry that London property was a safe port in a storm - buying London property became standard advice from Private Bankers to UHNW clients. Now, there is a volte-face taking place. The Private Banking industry and institutional investors know they're in dangerous bubble territory, with yields about to go negative. The bubble is surely about to pop in a dramatic way.

Welcome to HPC, cracking post absolutely spot on, the last 3 sentences are really interesting new bit for me though - new investment rate not high enough to keep the ponzi inflated?

[Borisina]

There are huge job losses in the City this year - UBS, Deutsche, Citi, and dozens of medium-sized banks have already announced planned mass layoffs (3000 in UBS alone!). 100,000 City jobs have been lost since 2008, and there is no sign of the job losses bottoming out.

The City bonus pool has shrunk to a 15-year low of £1.5bn. This has not been replaced with higher salaries for the vast majority, perhaps a few lucky individuals in the right jobs have managed to negotiate a higher salary to compensate. Most (95%) of people in Banking are employed at Analyst/Associate/VP level, paid 35-80k, and salaries in most banks are static, and there are very few lateral moves (which used to be the source of large payrises in the past).

Add to this the impact of the housing benefit cap as discussed above, and you have the perfect storm - there simply are not enough well paid people in London to fill all those thousands of £500pw small one-bed flats in mediocre areas of London, let alone 'prime' lettings.

Prices on prime lettings are falling. Yields have already fallen below 2% on prime, and are falling further, likely to go negative in the near future. The economic fundamentals of London do not support, in any way, the current bubble - stoked as it is by foreign investors buying off each other, in the deluded belief that the good times cannot end for London property. The whole thing is a house of cards, and the economic fundamentals have started rocking the very table it's build on.

But here's a really important point: All those super-wealthy individuals didn't start buying London property of their own accord, en masse, through some kind of bizarre co-incidence. No. They were advised by the Private Banking industry that London property was a safe port in a storm - buying London property became standard advice from Private Bankers to UHNW clients. Now, there is a volte-face taking place. The Private Banking industry and institutional investors know they're in dangerous bubble territory, with yields about to go negative. The bubble is surely about to pop in a dramatic way.

[TheCountOfNowhere]

About how many? What type of job? Private or Public sector?

Ten people or there abouts, IT based. Private sector.

[Dr_Mibbles]

Thank you. Volte-face - I have learnt a new phrase today.

When you say that there is this change of direction by the above, on what evidence do you say that?

A fair question - I've consulted with the Investment Banking industry for more than 10 years now, managing major projects in both European and American banks. I'm not a banker, I work in organisational psychology, but I consult on projects which impact hiring, promotion, and leadership development in the banks. Through this, I've developed a solid network of senior level contacts through the industry, not to mention numerous friends who feel able to confide in me things which go on inside the banks, and which probably would turn the stomach of those 'on the outside'.

I'm currently working on a major 6 month project with a very large British bank, working across their investment banking and wealth management divisions. It's the wealth management division who are providing the insight with regard to the London property market.

[gimble]

There are huge job losses in the City this year - UBS, Deutsche, Citi, and dozens of medium-sized banks have already announced planned mass layoffs (3000 in UBS alone!). 100,000 City jobs have been lost since 2008, and there is no sign of the job losses bottoming out.

The City bonus pool has shrunk to a 15-year low of £1.5bn. This has not been replaced with higher salaries for the vast majority, perhaps a few lucky individuals in the right jobs have managed to negotiate a higher salary to compensate. Most (95%) of people in Banking are employed at Analyst/Associate/VP level, paid 35-80k, and salaries in most banks are static, and there are very few lateral moves (which used to be the source of large payrises in the past).

Add to this the impact of the housing benefit cap as discussed above, and you have the perfect storm - there simply are not enough well paid people in London to fill all those thousands of £500pw small one-bed flats in mediocre areas of London, let alone 'prime' lettings.

Prices on prime lettings are falling. Yields have already fallen below 2% on prime, and are falling further, likely to go negative in the near future. The economic fundamentals of London do not support, in any way, the current bubble - stoked as it is by foreign investors buying off each other, in the deluded belief that the good times cannot end for London property. The whole thing is a house of cards, and the economic fundamentals have started rocking the very table it's build on.

But here's a really important point: All those super-wealthy individuals didn't start buying London property of their own accord, en masse, through some kind of bizarre co-incidence. No. They were advised by the Private Banking industry that London property was a safe port in a storm - buying London property became standard advice from Private Bankers to UHNW clients. Now, there is a volte-face taking place. The Private Banking industry and institutional investors know they're in dangerous bubble territory, with yields about to go negative. The bubble is surely about to pop in a dramatic way.

I like what you're saying (my story v. similar to yours) but here's a problem: I'd have thought that most wealthy foreign investors won't sell at a loss unless they HAVE to. There might be a few BTL types at the margins that will need to sell if the HB cuts really do hurt them, maybe that's enough to affect the whole market - we will certainly see in the next year or so. But I don't see mega bucks Arabs and Russians accepting big losses on their Mayfair townhouses unless they really need the funds for other purposes - your London pad is worth 1 million when you paid 2 million for it. Should you sell it? I wouldn't unless I really needed to - it's still somewhere to go and hide when there's a revolution at home, it's still somewhere for your son to live in when he studies in the UK. I hope I'm wrong anyway, I think it's an utter disgrace the way London property has been appropriated by the global elite as a cheap place to stash their often ill gotten lucre at the expense of people actually living in and working in and contributing to the city.

[righttoleech]

It would seem that a certain type of LL has deliberately targeted HB tenants - buying cheaper properties in scruffier areas and furnishing/renovating them with cheap, 'this'll do' fixtures etc.

Judging from many cases on HUTH, particularly oop North, you could always tell when this was the case - they knew to a penny what rent they could get - yields often high enough to have the presenters practically orgasmic.

Glad not to be the only one who finds the HUTH greed distressing......and if the 'pwoperdy developer' should mention that tis is the nth property in their portfolio the presenters shoot their respective loads.

[Dr_Mibbles]

I like what you're saying (my story v. similar to yours) but here's a problem: I'd have thought that most wealthy foreign investors won't sell at a loss unless they HAVE to. There might be a few BTL types at the margins that will need to sell if the HB cuts really do hurt them, maybe that's enough to affect the whole market - we will certainly see in the next year or so. But I don't see mega bucks Arabs and Russians accepting big losses on their Mayfair townhouses unless they really need the funds for other purposes - your London pad is worth 1 million when you paid 2 million for it. Should you sell it? I wouldn't unless I really needed to - it's still somewhere to go and hide when there's a revolution at home, it's still somewhere for your son to live in when he studies in the UK. I hope I'm wrong anyway, I think it's an utter disgrace the way London property has been appropriated by the global elite as a cheap place to stash their often ill gotten lucre at the expense of people actually living in and working in and contributing to the city.

You raise a valid point, however I think there's a danger of the mythical 'Russian tycoon' cliche being over-played.

The problem isn't so much Belgravia townhouses held by Arab Princes and Russian Oligarchs, of which there are only very few (indeed there are only 36 billionaries who are known to hold London property) . The issue is more the large amount of smaller properties in prime areas, sold at extremely inflated prices to wealthy but not outrageously rich individuals as an investment during stormy economic times. These properties represent money they would otherwise have placed in government bonds, for example.

Fear of further loss propels people to accept losses during the bursting of a bubble, much in the same way as delusion about ever-larger gains compels people to purchase during the inflation of a bubble. Yes, you may lose 20% if you sell now, but what will you lose if the market REALLY crashes, isn't it better to cut your losses now? It's this psychology which drives irrational behaviour around both the inflation and deflation of bubbles. Panic sets in, and the rest simply follows.

[winkie]

Most of the top notch London property has never been affordable to most London residents that work doing normal London jobs.......never has never will.....but what it has done is cause a ripple effect out to the homes most could and would purchase that they now find impossible today......ordinary homes being spit up into HMO bedsits and converted flats to help lower the costs......less space for more money.

http://www.youtube.com/watch?v=6H-76W9Umh8

[koala_bear]

I like what you're saying (my story v. similar to yours) but here's a problem: I'd have thought that most wealthy foreign investors won't sell at a loss unless they HAVE to. There might be a few BTL types at the margins that will need to sell if the HB cuts really do hurt them, maybe that's enough to affect the whole market - we will certainly see in the next year or so. But I don't see mega bucks Arabs and Russians accepting big losses on their Mayfair townhouses unless they really need the funds for other purposes - your London pad is worth 1 million when you paid 2 million for it. Should you sell it? I wouldn't unless I really needed to - it's still somewhere to go and hide when there's a revolution at home, it's still somewhere for your son to live in when he studies in the UK. I hope I'm wrong anyway, I think it's an utter disgrace the way London property has been appropriated by the global elite as a cheap place to stash their often ill gotten lucre at the expense of people actually living in and working in and contributing to the city.

The current "book" value of a (prime) property bought X years ago if effectively defined by the prices of similar properties selling today, if not enough people keep investing in ponzi then the actual transaction prices can start falling and the theroetical book value of the property dive as well, so the theoretical profit drops too, if that goes on for long enough they start questioning the whether it is worth holding.

[TrevorS]

This argument doesn't work. If landlords can replace HB tenants with non-HB tenants paying higher rents, why haven't they already done it?

They are, but it doesn't often make headlines (unlike 'Joy for homeowners').

Squeezed out: London landlords evict tenants hit by housing benefit cap: http://www.guardian.co.uk/society/2012/apr/24/london-landlords-housing-benefit-cap.

From the mother of an evicted family living in the Premier Inn in Hanger Lane "My three-year-old just says 'Mummy, I want to go home'. It's horrible."

From a landlord in the process of evicting 44 families:

"...he was unconvinced by the government's assertion that rents will drop as a result of the cap"

"Landlords were unable to drop rents so radically, he said. "It is so way below reality," he said"

"he is confident that he can find new tenants for the properties at the pre-cap rate, once the housing benefit tenants are evicted."

A Khafka-esque twist:

"If a tenant is evicted because of rent arrears the council may not have a duty to help them because they are judged to have made themselves intentionally homeless."

Housing benefit caps to make 810,000 homes unaffordable for tenants: http://www.landlordtoday.co.uk/news_features/Housing-benefit-changes-will-make-810-000-homes-unaffordable-for-tenants

"Tenants in London and the South-East will be hit hardest. A quarter of a million homes will become unaffordable in the region, says the Chartered Institute of Housing."

"Harrow Council is considering a housing report following months of consultation, including how to help residents move out of the area if they cannot afford local housing". Nice of them to 'help'. The outer London boroughs have been hit by waves being displaced by inner London councils, who are often cashing in by selling the vacated property. The outer boroughs in turn seek to displace the problem elsewhere.

There have also been a series of reports in local papers about councils similarly 'helping' thousands to 'leave the area'. Some were families with deep roots, including people born and bred in London who, through no fault of their own, find the system rigged against them. Even some 'hard-working families'!

Meanwhile London rents at all-time high as prices rocket eight times faster than wages: http://www.standard.co.uk/news/london/london-rents-at-alltime-high-as-prices-rocket-eight-times-faster-than-wages-8578230.html.

Looks like the brilliant solution to the problem is not having the promised effect. Evicted tenants are the collateral damage in the poker game between landlords and the government, but it seems this is considered a price worth (other people) paying.

Edited May 13, 2013 by TrevorS