W.A.Ellis research - autumn 2013
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5 years on HOW THE LONDON PROPERTY MARKET HAS FARED AFTER THE LEHMAN BROTHERS COLLAPSE On 15 September 2008, Lehman Brothers, the fourth largest investment bank in America filed for bankruptcy. At the time of the collapse, the UK and London housing markets were already under pressure. The global credit crisis, which had begun in 2007, was worsening, mortgage lending was tightening and house prices across the country were falling. This report looks at how the housing market has changed over the five years since the collapse; the beginnings of a recovery and the lasting impact of the financial crisis. AUTUMN 2013
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Five years since the collapse of Lehman Brothers, the global property market has seen peaks and troughs in recovery. We review how London has fared and where our City sits now.
Transcript of W.A.Ellis research - autumn 2013
5 years on HOW THE LONDON PROPERTY MARKET HAS FARED AFTER THE LEHMAN BROTHERS COLLAPSE
On 15 September 2008, Lehman Brothers, the fourth largest investment bank in America filed for bankruptcy. At the time of the collapse, the UK and London housing markets were already under pressure. The global credit crisis, which had begun in 2007, was worsening, mortgage lending was tightening and house prices across the country were falling. This report looks at how the housing market has changed over the five years since the collapse; the beginnings of a recovery and the lasting impact of the financial crisis.
AUTUMN 2013
NORTHERN ROCK
BAILOUT
SEPT 2007
Property market prospered before collapseIn the run-up to the financial crisis, conditions in the UK housing market, buoyed by confidence in the wider economy, were strong. Momentum had been building steadily over 2006 and continued into the first half of 2007. By August 2007, according to the Land Registry, average house prices were rising at 9.2% per annum, while transactions peaked at over 120,000 – a total that has not been exceeded since.
Gross mortgage lending in June 2007 reached £32bn (Bank of England), the second highest month on record – surpassed only by the £32.2bn recorded in November 2006. But by mid-2007 everything started to change. The Bank of America was talking of a one-in-five chance of a ‘severe crash’ in the US housing market and in September 2007, Northern Rock came close to collapse. The impact of the ensuing financial crisis on the mainstream housing market was striking.
Immediate decline in confidence in property marketTransactions fell immediately, going down by 22% in September 2007 alone compared to the previous month. Mortgage lending fell by 20% in the 12 month period between October 2007 – September 2008, compared to the same period a year earlier. This had a direct impact on sales, which fell 39% over the same period. It is no surprise therefore that average prices were also hit, and when Lehman Brothers collapsed in September 2008, the Land Registry was reporting that prices across England and Wales were 9% lower than just a year earlier.
By the time Lehman Brothers collapsed in September 2008, the UK housing market looked very different to the first half of 2007. A worldwide credit crunch had
taken grip and confidence in the housing market was at a low ebb. In the 12 months between October 2008 and September 2009, transaction volumes fell by 33%, compared to the same period a year earlier.
Just a year after the collapse, average sales prices across England and Wales had fallen by a further 5%. Housebuyers remained concerned about the economy and were further hampered by constrained mortgage lending as banks had significantly tightened their lending criteria. In the 12 months between September 2008 and 2009, annual gross lending fell by 48% to £150bn, compared to £296bn in the same period a year earlier (Bank of England).
A slow battle to regain momentum … but signs are positiveThe UK housing market has struggled to regain momentum following the financial crisis. Although signs are that confidence is beginning to return and house prices are starting to rise, today’s market is very different to that of five years ago.
Transaction volumes remain subdued with sales over the last 12 months still 15% below where they were in the year preceding Lehman’s collapse and a massive 48% below where they were in the 12 months leading up to the bailout of Northern Rock. Average sales values remain just under where they were in September 2008 (-0.8%).
That said, today’s housing market is showing signs of recovery. Government stimuli such as Funding for Lending, and more recently Help to Buy, are starting to impact on both volumes and prices. The outlook for the UK housing market looks brighter than at any point since the financial crisis first began.
Prime central London quicker to recoverIn prime central London (PCL) the last five years show a very different story. While prices and volumes undeniably fell in the aftermath of the financial crisis, the recovery came much quicker and stronger.
As in the wider UK housing market, transaction levels in PCL were hit hard as the financial crisis began to take grip. Transaction numbers peaked in 2006, but in the 12 months following the collapse of Northern Rock, they fell back by 43%. While average prices in PCL were hit by the collapse of Lehman Brothers in September 2008, transaction levels had, by then, already bottomed out. Sales volumes between September 2008 and 2009 were 5% higher than the same period a year earlier.
Meanwhile, average sales prices which had managed to stay strong throughout the early stages of the financial crisis, started to tumble in mid-2008. The fall of Lehman Brothers only exacerbated the problem further. The average price paid per square foot in central London fell by 9% in the 12 months post-Lehman collapse.
The recovery of the prime central London market began to take root in 2009 and at a pace that outperformed the wider London and national residential markets. London has long been considered a safe haven and, as economies across the world faltered, overseas investors attracted by advantageous exchange rates sought refuge in the prime residential markets of the capital. Cash buyers, unaffected by constrained lending, have driven the prime markets through the downturn. In Q2 2007, cash buyers in Kensington and Chelsea accounted for just 30% of purchasers, in contrast to Q2 2013 when the figure rose to 52%.
Fresh challenges to the London property marketAlthough Lehman’s is well behind us, recent years have brought further and, arguably more transforming, changes to the prime central London market. In particular, transaction volumes have been hit, once again, by changes to stamp duty thresholds in both 2011 and 2012.
The 5% tax for properties over £1m introduced in 2011 was largely absorbed by the market. However, the 7% stamp duty threshold for sales over £2m brought in a year later, coupled with uncertainty surrounding additional taxes for company owners, had a greater impact. In the 12 months following these changes, sales of properties between £2m and £3m fell by 19% compared to the previous 12 months, while transactions between £1m and £2m rose by 6.4%.
The longer term impact of these changes continues to dictate purchasing decisions by both overseas and domestic buyers, with demand levels affected for properties closest to the threshold. However, overall prices continue to rise, with the average price paid across PCL increasing by 7% over the last 12 months.
The PCL residential market of 2013 continues to change and adapt to the challenges it faces. Indeed, those who have been watching the PCL market over the past five years can have faith that, whatever is thrown at it, it remains ever-resilient.
A dramatic fall from graceThe collapse of Lehman Brothers in September 2008 represents the largest bankruptcy filing in US history and its impact was to send shock waves across the globe.
Lehman Brothers had invested heavily in housing related assets, but by 2008 the US housing market’s bubble had burst. The sub-prime market in particular was hit hard as interest rates rose and borrowers struggled to meet mortgage payments. Lehman Brothers, who held considerable investments in sub-prime mortgage backed securities, increasingly failed to secure investors. Confidence fell and the bank collapsed.
NUMBER OF TRANSACTIONS UNDER £2 MILLION NUMBER OF TRANSACTIONS OVER £2 MILLION AVERAGE £PSF
SPENT ON RESIDENTIAL PROPERTY IN CENTRAL LONDON SINCE LEHMAN’S COLLAPSE.
TRANSACTIONS AT THE END OF Q2 13 AS A PROPORTION OF PEAK LEVELS
Source: Lonres / Dataloft*ATED stands for Annual Tax on Enveloped Dwellings – an annual charge for properties worth in excess of £2 million owned by a company rather than an individual.
£00
£300200
£600400
£900600
£1,200800
£1,5001,000
TRAN
SAC
TIO
NS
£PS
F
Q1 06 Q1 07 Q1 08 Q1 09 Q1 10 Q1 11 Q1 12 Q1 13Q2 06 Q2 07 Q2 08 Q2 09 Q2 10 Q2 11 Q2 12 Q2 13Q3 06 Q3 07 Q3 08 Q3 09 Q3 10 Q3 11 Q3 12Q4 06 Q4 07 Q4 08 Q4 09 Q4 10 Q4 11 Q4 12
ICELANDIC BANKING CRISIS
OCT 2008
ABOLITION OF HIPS
JUNE 2010
UK ELECTION OF COALITION GOVERNMENT
MAY 2010
5% STAMP DUTY OVER £1M
APRIL 2011
0.5% INTEREST
RATE
MARCH 2009
Impact on prime central London of Lehman Brothers and other key economic events
Average £ per square foot rose 51% since beginning 2009
AUTUMN 2013
2008 2,045 SQ FT 2013 1,466 SQ FT
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£21bn
87%
The value of £2m
in central London
AVERAGE SALES PRICE PER SQUARE FOOT IS NOW
HIGHER THAN AT THE TIME OF THE LEHMAN’S COLLAPSE
IN SEPT 2008 AN AVERAGE 2 BED FLAT IN CENTRAL LONDON WAS WORTH
IT WOULD NOW SET YOU BACK
37.5%
£930,000
£1.3m
LEHMAN BROTHERS COLLAPSE
SEPT 2008
HELP TO BUY STARTS
ANNUAL TAX ON ENVELOPED DWELLINGS (ATED)* UP TO £140,000 TOOK EFFECT
7% SDLT PROPERTIES OVER £2M
15% FOR CORPORATE BODIES
Transactions in 2008 56% lower than peak year of 2006 Average prices in central London bottomed out at £890 psf, falling 17% in 9 months
APRIL 2013MARCH 2012
LUCY MORTON RICHARD BARBER TIM DES FORGES SIMON GODSON DANIEL WIGGIN JAMES WILSON
28%
42,500
6%
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PCL rental marketThe statistics show that the lettings market has regained strength. Average rents are now some 20% higher than they were at the bottom of the market at the end of 2009, although they remain 0.6% below their peak at the end of 2007. The outlook for City employment is improving and it is anticipated that rental growth will continue in the medium term as the economy continues to improve.
However, as with the sales market, there are some noticeable differences in the lettings market of central London now, compared to five years ago. Americans, with significant corporate budgets, accounted for 75% of the market pre-Lehman Brothers collapse – in 2013 they represent some 40%. With landlords nervous about corporate lets, tenancy agreements are also now structured differently with most contracts now being in the name of the individual as opposed to the company.
The last five years have seen wider demand for rental properties as attitudes to renting have changed. For example, first time buyers have increasingly turned to renting as they are priced out of the sales market and there is demand from downsizers selling their home to release equity, who then choose to rent. Wealthy international students are also now much more commonplace than they were five years ago and are competing with professionals for prime properties, particularly for studios and one bedroom flats.
As the value of property in prime locations has soared, yields have fallen back, causing some landlords to sell up and cash in, particularly in the house market. This has reduced the supply of family accommodation available for tenants. However, generally speaking the balance between demand and supply is more stable than before the financial crisis.
Good quality properties are in strong demand and letting quickly, in some cases at over the asking rental price. However, today’s tenants are savvy and more particular about the properties they rent, often looking for longer-term lets. Sub-standard properties are taking longer to let and risk undesirable void periods. These properties can also skew rental market data, pulling down headline reported average values.
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“Buyers have been impressed by the rapid return to growth in prime London and want to invest in an appreciating, tangible asset.” RICHARD BARBER
PROPERTIES LET Rolling 12 month average
AVERAGE WEEKLY RENTAL
Oct
062,000
0 £0
4,000
£200
6,000
£400
8,000
£600
10,000
£800
12,000
£1,000
£1,200
May
07
Oct
07
May
08
Oct
08
May
09
Oct
09
May
10
May
12
Oct
10
Oct
12
May
11
May
13
Oct
11
The rental market pre and post the financial crisis
AVERAGE RENT FOR HOUSES HAS RISEN
SINCE RENTS BOTTOMED OUT IN EARLY 2009
NEW TENANCIES HAVE BEEN AGREED IN CENTRAL LONDON SINCE THE LEHMAN’S COLLAPSE
OVERALL RENTS ARE
HIGHER THAN AT THE TIME OF LEHMAN’S COLLAPSE
Source: Lonres
Disclaimer: This report is produced for general information only. Whilst every effort has been made to ensure the accuracy of this publication, WA Ellis accepts no liability for any loss or damage of any nature arising from its use. At all times the content remains the property of WA Ellis under copyright and reproduction of all or part of it in any form is prohibited without written permission from WA Ellis.
Date of publication: September 2013
Within this document prime central London is defined as covering Kensington, South Kensington, Belgravia, Knightsbridge, Notting Hill, Holland Park, Mayfair, Chelsea and Hampstead.
