Nov 22 2013

Top UK estate agent: top end of housing market is in a slump

Posted by: Nicholas Shaxson in: Thoughts

Trevor Abrahmsohn

Update, Nov 28 – Just to reinforce the point, see this story that just emerged from the Evening Standard: a £65m property slashed to £30m – and more. I find it peculiar that the mainstream media is largely ignoring this trend. I told a house-owning relative in the UK about this, and such is the mania out there that she managed (don’t ask) to twist this price-fall story into a story about how prices could only ever go up.

I’ve just got off the phone to Trevor Abrahmsohn of Glentree estate agents, who dominates the North London high-end property market and has been described as “Estate Agent to the Rich and Famous.” His clients, according to newspaper reports, have included Bernie Ecclestone, Ringo Starr, Joan Collins and Lakshmi Mittal, Britain’s richest man.

What he has just described to me – an 80 percent drop in transaction volumes in important sections of the very top of the UK property market in recent months, along with apparent price ‘deflation’ – will startle a lot of people caught up in the hysteria about Britain’s fizzing upper-middle housing market.

While researching my long Vanity Fair article on the UK’s super-prime property market in April I began to catch early inklings of this, but it seems things have since moved on quite briskly.

This is what Abrahmsohn told me:

“In the country, outside the metropolis, the number of properties agreed – which gives an idea of the activity out there — are down by four fifths, for properties over two million [pounds.]

I’d say that property turnover within London, but outside of the immediate village of central london, is down by 50 percent or more, for properties over five million [pounds.]”

And as for the high-end central London ‘village’ itself:

“Because there is such an acute shortage at the best of times, it is masking what would otherwise be a problem. For instance, you’d usually get nine buyers for any one property: you now have one. Ordinarily, they would be in recession as well, but because the supply and demand ratio is so dramatically skewed, the supply of buyers is drying up, but there is still such acute shortage of supply that you are still seeing transactions take place. But the trend is about reducing numbers of buyers: demand is shrinking quite dramatically, but there is still enough to produce transactions.”

So much for turnover. What about prices? Well, that’s harder to discern, especially in thin markets. He continued:

“Prices are stagnant, things are not selling, so you don’t know where real value is, because not a lot of properties are getting sold. But certainly there is no inflation: that is for good and sure. I’d say there is deflation. It’s been getting progressively worse over the last year.”

These changes have happened, he said, over the last six to 12 months. Indeed, this matches some things I wrote in a blog in September, which quoted a buying agent as saying that One Hyde Park, the core subject of my Vanity Fair article, had turned out to be:

“the worst investment anyone could have made in prime central London.”

And indeed by then we had already begun to see anecdotes pointing to possible trouble in this top-end market, as evidenced by stories such as “Lakshmi Mittal Taking Major Loss On London Mansion.”

Back to November – the present day – and it’s important to note that beneath these exalted top-end price levels, in the all important middle to upper class brackets, things are very different. Abrahmsohn continues by describing what is widely known:

There is great activity between half and two million pounds: it is a very healthy market.

But at the top end, he continues, “property prices will drop by up to half in the middle to upper brackets” if current proposals go ahead to impose a so-called Mansion Tax, under which any home worth more than £2 million would be taxed at an annual rate of 1 per cent of its value above the threshold.

That is a ferocious prediction. And it brings us to the all-important question of tax.

Abrahmsohn says that the proposed Mansion Tax, which is part of a rolling package of capital gains and other tax measures that have been implemented or are being considered (amid rising concerns about potential property bubbles, difficulties for first-time buyers, economic inequalities, foreign-owned houses sitting empty amid a national housing crisis, and so on) is absolutely central to the stagnation that is now being seen in these sections of the market.

He calls the Mansion Tax as a “wealth tax”, or a “home tax” (since, he argues, the level at which the tax kicks in will be brought from £2 million down to £1 million, which he says is certainly not a ‘mansion’, at least in London), and adds:

“The wealth tax will have the most profound effect on the UK housing market since Dennis Healey didn’t have the temerity to impose one in the 1970s.
. . .
If the Mansion Tax does, as I am suggesting, halve prices at the higher end, all that will come cataclysmically down to the lower levels, and before you know it a lot of people who are presently above water will be in negative equity. “

That is quite a scenario. Unsurprisingly, he is not happy about it:

“If you went to a betting shop and put a bet on, the odds are that they will bring in a Mansion Tax, as stupid as it may be.
. . .
Taxation should only be a revenue raising device, and it can be very effective. But for socialists who need to be whipping the ‘wealthy’ because they feel their brethren want to see that sport, it’s not good enough.”

Not everyone shares Abrahmsohn’s views about the impact, or the desirability, of tax rises or cuts, or price rises or falls, in this market.

The big question at the heart of all this, I guess, is this. Is this an overheated market just waiting to be brought back to reality: a bubble ripe for popping?  In which case, a tax rise might simply be a trigger for a necessary rebalancing that is going to happen anyway — and many would say it’s a fair approach too.

Or is this a case merely of a healthy, exuberant market being sabotaged by meddling politicians? In which case, as Abrahmsohn and many others in the market whom I’ve spoken to see it, the taxes might be seen as a spectacular own goal. Abrahmson calls some of the recent tax developments

“an obscene case of ineffective tax-raising.”

So which view is right?

Well, there certainly are plenty of warning signs out there suggesting that this part of the market, if not the UK housing market as a whole, is well into bubble territory. But it’s also famously hard to spot bubbles. As Undercover Economist Tim Harford said in the Financial Times this week:

“I have been convinced that London’s housing is overvalued for at least a decade. The longer the boom continues, the more I doubt myself – even if the evidence of unsustainability just gets stronger.”

Rental yields on these very highly priced properties at the top end in particular are looking less attractive following such stark price rises: below three percent in some top postcodes, Harford notes. That factor may well be deterring many buyers. Affordability is also getting crunched, quite a long way down the property ladder, as even people who might have considered themselves wealthy are squeezed ever further away from central London.

On the impact of tax rises, that’s rather imponderable. But while researching my Vanity Fair story, for what it’s worth, I did get this viewpoint from another top-end estate agent:

“Most of those who come north of 20 million [pounds] don’t really know what the taxes are until they start to buy a property. They agree, then they say ‘how much is Stamp Duty Land Tax, and Council tax?’ You tell them, and they don’t seem particularly bothered by it. It is part of what you have to pay, isn’t it, for living in London?”

To be fair, though, the so-called “Mansion Tax” is a stronger proposition: not a one-off levy, but an annual levy on the value of the home. The tax will surely have some impact. But then again, this is kind of what some of the supporters of the tax intend anyway: many politicians, and many economists, think such astronomical prices aren’t healthy.

If this market now starts to play out as suggested here, and top-end prices start really falling, then the levels below that start crumbling too, then a whole era of political finger-pointing will begin.

One one side, there will be those like Abrahmsohn who say that bungling bureaucrats are killing the Golden Goose with ill-considered tax measures; on the other, there will be those who say that this market had lost all its moorings with reality and was due for a fall anyway – and it’s only fair that the richest should pay their share.

Those who’ve read Treasure Islands can probably guess which side of that argument I’ll be on.

What surprises me, I guess, is that the nation’s property journalists don’t seem to have caught onto this crucial trend in the market. Perhaps the price euphoria has become so pervasive that nobody really wants to believe it. Yet. This arena is still full of headlines like this one, just a few days ago:

“House prices in the UK set to rise by 24% by end of 2018, latest forecast suggests.”

Well, maybe. Let’s see what happens.

one comment

Steve Crossan 11th November, 2013 4.18 pm

Very interesting. Noticed some of this last Spring when buying (not in prime or anywhere near these prices) in London. Estate Agents putting prices up – but actually not much competition for houses. Things staying on the market quite a long time. The house we bought we were the only bidder.

What’s going on? A theory of sorts: London prime property has had a status as a sort of global reserve currency during the long recession. As we start to pull out of that – opportunities in other places – the global money isn’t piling in so much. Especially, as you point out, when rental yields so low.

In the middle, no-one can actually afford to move (cos no matter how much your house is worth, the next one is out of reach). So very little coming on the market. Estate Agents are pushing sellers to market with the offers of very high prices – relentlessly up every month. Enough to tempt a few into the market – but so high that they’re restricting demand. Only places we saw were people moving out of London, or downsizing after kids left home.

Root cause: wealth distribution. If a very tiny proportion of society takes a huge chunk of the pie, they just can’t spend it to recirculate it. So you get big asset bubbles. Taxation part of the answer? Especially – make it neutral whether an individual receives income as ‘capital gains’ or ‘income’.

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