Saturday, Mar 28, 2015

Flood of dirty Russian cash is not a real bull market - it's a corrupt bubble built on naivety

The Telegraph: Jim Mellon: This stat tells you why London house prices are falling

"There are 41,000 new units being built in London over £1m.
Last year only 3,000 homes were sold for more than a million pounds in London.
It's way over-built, way over-leveraged and way over-priced.
[...]
The rest of the country seems reasonably revalued - the big caveat of course is what happens if interest rates rise?"

Posted by sneaker @ 10:16 AM (9577 views)
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19 Comments

1. reticent said...

Good find. Mind-boggling.

Sunday, March 29, 2015 03:01AM Report Comment
 

2. taffee said...

Didn't Ireland and Spain build like crazy to satisfy huge demand?

Unfortunately it was just a speculative bubble

Sunday, March 29, 2015 06:36AM Report Comment
 

3. cyril said...

Unfortunately I think his figures are wrong - the number of £1m houses sold in London is nearer 10,000 a year - so 44,000 in construction doesn't seem that unrealistic (given they take a couple of years to build).
I've just done about 10 seconds research on the internet and found a press release from Lloyds Banking Group which says that 70% (4,259) of all million pound home sales in Britain during the first half of 2014 were in London.
I would have thought Britain's answer to Warren Buffet would be better informed.

Sunday, March 29, 2015 01:34PM Report Comment
 

4. Latterdaysinner said...

I don't think the figures are wrong. I downloaded the land registry database for 2105 so far and January saw 305 sales in Greater London =>£1m.

Sunday, March 29, 2015 02:08PM Report Comment
 

5. cyril said...

@4
I had a look at the land registry database but it makes no sense to me. There are houses in London sold for 50k which can't be right. Anyway I've traced another source of the factoid that Mr Mellon may have been referring to. It's in the FT on 26 Jan.
"About 54,000 homes are either planned or already under construction in the priciest areas of the capital — stretching from Earl’s Court and Regents Park to Tower Bridge and the South Bank — according to research by data company Lonres, researchers Dataloft and buying agents PropertyVision. Most of these homes will be priced at close to or above £1m. However, just 3,900 homes worth more than £1m were sold in these areas in 2014, the research found."
So it's the usual estate agent's double-speak : ...planned OR under construction... MOSTof the homes will be priced CLOSE TO £1m etc.
But the main point is that the 3,900 homes refers to an area of central London not the whole of London. It's basically rubbish anyway!

Monday, March 30, 2015 06:53PM Report Comment
 

6. Latterdaysinner said...

I'm not sure if there is a source that is more reliable than the Land Registry, but regardless, I agree with his sentiment because the new units being built represent additional supply, whereas most transactions would be expected to be for existing units. There is no obvious reason why the number of existing units coming to the market should fall in the future, so the availability of additional units can be expected to make a big difference to the demand/supply balance.

I have posted the picture at the following link on this site before. It shows a real terms index of the value of private residential construction activity in London and whole of GB, taken from the ONS. I think it speaks for itself, and confirms what one might suspect from the number of cranes to be seen all around London.

http://i.imgur.com/m327mFu.png?1

Monday, March 30, 2015 09:25PM Report Comment
 

7. sneaker said...

Central London is where the majority of £1m+ houses would be sold (K&C, Westminster) so this area accounts for the bulk of the volume at that price level. I can't imagine massive volume in Dagenham, Hounslow or Harrow at that price-bracket. You'd get some in Hammersmith & Fulham, Camden/Islington, Wimbledon, Wandsworth etc. But this is still a limited part of the overall mass of London.

Tuesday, March 31, 2015 01:48PM Report Comment
 

8. latterdaysinner said...

Regardless of how clean the Land Registry data is, this is additional supply, which will go on top of the regular churn in existing supply. Churn of existing housing is unlikely to change much in the future. Overall, this is likely to have a big effect on the supply-demand balance.

I've posted the following chart (link below) on this site before. It shows a real terms index of economic activity in private residential construction for London (as defined by the ONS) and for GB as a whole. I think it speaks for itself and confirms what you might suspect from the sheer number of cranes on the London skyline.

http://i.imgur.com/onbTQgZ.png?1

Tuesday, March 31, 2015 07:18PM Report Comment
 

9. sneaker said...

Fascinating!

Tuesday, March 31, 2015 07:46PM Report Comment
 

10. libertas said...

OK, a small number of £1m houses sell in City of London, because there are hardly any homes there to buy. Same too for much of the rest of central London, which is mainly commercial real estate. Much of the million pound properties are places like Wandsworth, Hammersmith and further west, south west and north London. What we are seeing here is a major boom in central London properties for the first time in a generation, essentially seeing a final reversal of the 1980's hollowing out of the core. People previously did not buy expensive places in central London because hardly any existed. We will now see a flood into these high rises. In the meantime, this saps up millionaire demand, whilst the middle classes sulk further and further into suburbia.

Two months to go now before lines to Enfield Town, Chingford and Cheshunt join London Overground. I'm looking forward to a flood of refugees from Hackney who need a family home and cannot afford a flat in Hackney. Homes there that cost £600k to £800k cost £250k to £350k out here, and we are only 10mins from Hackney by train.

The rush could become a stampede, similar to the rush into central areas.

It just goes to show, that London has significant capacity to grow. Some reports state that developing 15% of the greenbelt around London would alone satisfy demand to 2050, whilst the neglected suburbs built just before the previous 1939 population peak are bustling with development and infrastructure opportunities.

Meanwhile, the Old Kent Road Opportunity Area is half the distance between Battery Park and Central Park in Manhattan, and has almost limitless development opportunities, plus 200k houses can be built on the Lea Valley.

Tuesday, March 31, 2015 11:22PM Report Comment
 

11. latterdaysinner said...

"We will now see a flood into these high rises."

You appear to believe that supply creates its own demand. I have sympathy with that view, but the mechanism for this dynamic is the price mechanism, and it would be working in a direction that you are unlikely to be happy with.

Wednesday, April 1, 2015 08:51AM Report Comment
 

12. taffee said...

Didn't Ireland Spain and U.S. build and they will come(taken to extremes in China) satisfying huge demand?

Unfortunately it was just a speculative bubble which was burst by their own actions

Wednesday, April 1, 2015 09:08AM Report Comment
 

13. cornishman said...

latterdaysinner@Tuesday, March 31, 2015 07:18PM - what do the numbers on the y axis of the graph in your link represent?

Wednesday, April 1, 2015 09:08AM Report Comment
 

14. latterdaysinner said...

They are an index, with base year being 1980, so only meaningful in the relative sense. The two indexes in the graph are based on ONS numbers for output in the construction of private housing in London and GB as a whole.

http://www.ons.gov.uk/ons/publications/re-reference-tables.html?edition=tcm%3A77-358212

See Table A on the web page and then table 6 worksheet (regional breakdown).

My numbers are deflated by CPI over time, so won't be exactly the same, but I think they represent a truer picture of the level off activity than the ONS values in current prices.

Wednesday, April 1, 2015 10:39AM Report Comment
 

15. clockslinger said...

Right, so there IS no shortage of supply then and loose monetary policy s the source of HPI. That makes sense and accords with my experience in the real world, so can we stick to one idea and stop the need to build on green belt and it's all the fault of anyone over forty stuff now?

Wednesday, April 1, 2015 10:56AM Report Comment
 

16. cornishman said...

@latterdaysinner, thanks for the clarification. I couldn't come up with anything to relate the numbers to.

From what I can see from the spreadsheet, the index is based on price. So if all the recent residential build is a very high price, the graph will do as yours does. Do we know if the number of new bedrooms being built in London has increased at all in the last few years?

And as a by-the-by, your graph for London looks remarkably similar to the anatomy of a bubble chart that we have seen here umpteen times. I wonder if it will complete the graph in the way that that one does.

Wednesday, April 1, 2015 11:27AM Report Comment
 

17. latterdaysinner said...

@Cornishman, I agree with your interpretation. The data represents total value of construction work, so given that the boom is clearly skewed toward higher-end housing, the increase in the number of units or bedrooms will not be quite as dramatic (I haven't seen data for this but am also very interested). However, given the sheer scale of the increases, I would be astonished if there isn't also a significant increase in the number of units (or bedrooms) being built.

Also agree that it looks like the classic anatomy of a bubble. None of us can tell how long it will last. While I want there to be a price crash and think that one is inevitable, a part of me wants it to go on for at least a couple of years longer so that a meaningful amount of this building work actually gets finished. I fear that if it happens too soon the crash might be too shallow and somewhat unsatisfying :-) Having said that, construction activity, especially for tower blocks, has long lead times and would likely lag price movements significantly.

@Clockslinger, agree that supply constraint stories are a bit of a red herring and that blaming a select demographic is both unfair and pointless. I think the issue with the greenbelt is about concentration and what sort of housing you want to have. If you've happy for children to grow up without a garden, then fine. Personally, I grew up in a tower block with a park nearby and I wouldn't mind my children having a similar experience. However, I know that many people don't feel the same way.

Wednesday, April 1, 2015 01:11PM Report Comment
 

18. clockslinger said...

@17, au contraire mate, I'm not saying a blaming a select demographic is wrong, it just depends which demographic! Bankers and politicians particularly of the right (being more in the pocket of corporate sponsors) and the rich of any age are to blame to be precise.

Friday, April 3, 2015 08:27PM Report Comment
 

19. latterdaysinner said...

@18, I blame bankers for pocketing free money when given to them no more than I blame a dog for grabbing an unattended bone from the kitchen and burying it in the garden. Same for politicians. They're only ever different before they have tasted power. The key is not to give them any more power than is absolutely necessary and to have the threat of the boot hanging over them all the time. As for blaming the rich, bit of a general demographic there, isn't it? Are they any more to blame than the poor and greedy who leverage themselves up to the hilt in hope of massive un-taxed capital gains?

Sunday, April 5, 2015 12:02PM Report Comment
 

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