Central London high-rise property prices will crash by at least 50 per cent predicts Alastair Stewart, a consultant analyst with Stockdale Securities who has enjoyed a distinguished career in the City. Currently there are 62,050 residential units under construction in London, according to property data specialist Molior. That’s an amazing 156 per cent higher than at the last peak in 2007.
“The high number under construction reflect the combination of starts and longer lead times for the large complex sites which appear to be a particular hallmark of this cycle,” explains Mr Stewart.
Many of these developments are funded from Asia, and dependent on demand from the same source. It’s very much like Dubai was before the 2008 crash, with off-plan sales to foreigners and low down payments leveraging up the market.
“We’ve seen initial deposits as low as Â£2,000 [Dh9,566] with a further 10 per cent thereafter,” warns Mr Stewart. “But still, with the substantial majority, at least two-thirds to pay on completion.”
Therein lies danger.
“Investors facing margin calls may have to liquidate assets quickly,” he adds. “A longer-term risk could be that they simply cannot complete because of financial constraints.”
Will this leave another London buying opportunity for cash-rich Arab and expat investors? This looks like a repeat of the 1989-93 UK housing recession, when a much smaller bubble in London Docklands apartments exploded, forcing prices down by 40 per cent.
The recovery came at the end of 1992, when George Soros forced the pound sterling out of the European Exchange Rate Mechanism, causing a sudden drop in interest rates. Will something similar happen this time around?
Maybe not. The plight of the pound sterling is an argument for higher and not lower interest rates. UK base rates of 0.25 per cent – only recently cut from 0.5 per cent – do not have much more room to drop.
Before buying any asset it is always advisable to wait for an obvious catalyst for a market recovery. Otherwise you may have a long time to wait for something positive to happen. Britain, now facing many years of negotiations to exit the European Union, may not have a quick bounce back this time.
It could be that only the very EU exit itself marks the bottom of this housing cycle. That might be the moment to buy the best bargains and also coincide with the lowest valuation of the pound sterling against the dirham.
It was after the 1974 stock market and real estate crash that Gulf Arabs first became big buyers of Central London property. I know many families who still stay in those same apartments in Knightsbridge and Kensington each summer.
Indeed, that was actually the last chance to buy London property at bargain prices. It’s been steadily heading upward ever since. I still find it quite mind-blowing.
The one-bedroom penthouse apartment I rented in not-so-fashionable Soho this summer is worth more than my Dubai villa four times the size. I know London salaries are high, but you could earn the same tax-free in the Dubai financial sector in some occupations.
I concede that London house prices have been defying gravity for a long time. Mr Stewart and I used to be colleagues and he was very concerned about London house prices when we lunched in 1999. But they proved to be an outstanding buy then and only stumbled slightly in 2008 in the worst global financial crisis since 1929.
On the other hand, the mother of all bubbles may have been inflated in this asset class. It’s not only a matter of Asian money flooding the market but the ultra-low interest rates that followed the global financial crisis.
Everybody knows that these interest rates cannot last if investors are going to continue to invest in the future, and higher interest rates will mean only one thing for property prices: that they will go down.
Add to this toxic mixture the recent UK government measures to dampen foreign investment in London property and buy-to-let by domestic investors – a reduction in tax allowances and a 3 per cent hike in transfer taxes – and a serious crisis looms for London house prices. Sales have stalled since the Brexit.
Of course nobody knows just how low the pound will finally go. Plus London’s new mayor Sadiq Khan has promised to be less friendly towards planning permission for homes built for foreign speculators.
Beware of jumping the gun on London residential property. Wait for a recognisable market bottom and a catalyst to reverse it.
Peter Cooper has been a journalist in the Gulf for 20 years