Published October 21, 2008

London home buyers hold out

Outlook dims despite steepest price fall in 16 years; borrowers face higher downpayments, mortgage rates

OLIVER Fisk and his girlfriend have been hunting for a one-bedroom apartment in London for four years and they're further away than ever from getting onto the property ladder. 'We're definitely holding out for a bit longer, especially with the things that are going on with the banks,' the 28-year-old information- technology specialist said. Mr Fisk has moved in with his girlfriend's parents to save for the 21 per cent deposit that most lenders now insist on.

The steepest drop in London home prices in 16 years is deterring prospective buyers and worsening the rout in the property market. Higher mortgage rates mean the first-time buyer of a two-bedroom home is spending 12 per cent more per week than a year ago, said Richard Donnell, director of research at property data company Hometrack. And that doesn't take into account higher downpayments.

The number of loans granted to first-time buyers fell an annual 55 per cent in August to 15,600, according to the Council of Mortgage Lenders, whose members provide about 98 per cent of all UK mortgages. That was the lowest since the CML began compiling the data in 2000. The typical loan to such purchasers fell to &pound106,754 (S$274,414), the lowest since May 2006.

Borrowers took loans that accounted for 84 per cent of the value of the property and 3.18 times their income, down from 90 per cent and 3.39, respectively, in August 2007.

The property slump has been exacerbated by the worst banking crisis since the Great Depression, which has caused demand from the 400,000 people who work for banks, insurers and other financial-services companies to collapse.

Residential property prices in London probably will fall about 14 per cent this year, with the biggest declines in homes costing about &pound1 million or more, Knight Frank LLP estimates. In 2009, houses and apartments will lose another 11 per cent of their value, according to Knight Frank, Europe's biggest closely held property broker by revenue.

'It is futile at the moment to try and forecast the scale of house-price declines,' said Michael Coogan, director general of the Council of Mortgage Lenders, which has a membership of 158 banks, building societies, and other mortgage lenders, according to its website. 'Some of our members are forecasting up to 25 per cent falls from peak to trough.' The rising cost of financing caused UK home sales to fall to the lowest in at least three decades in the three months through September, the Royal Institution of Chartered Surveyors said on Oct 14. The biggest decline was in London, where brokers and surveyors sold an average of 8.3 homes in the quarter, compared with 11.5 for the whole country.

'We're just ducking and diving,' said Guive Emami, a broker at Savills plc in East London. 'I had a client, a lawyer on &pound50,000 a year and with an &pound80,000 deposit saved up, who struggled to find a mortgage.' Mr Fisk, who was living in Clapham, looked at apartments across south-west and was prepared to spend as much as &pound150,000. He gave up the search at the end of last year and is in no rush to start house-hunting again. 'Things are only going to get worse,' Mr Fisk said.

Prices for apartments and houses across London fell 9.4 per cent in the third quarter from a year earlier, Nationwide Building Society said on Oct 2. That was the biggest decline since 1992. The largest drop was in the borough of Hammersmith and Fulham in west London, where prices fell 13 per cent.

In October, asking prices for homes in London fell 2 per cent from a year ago, according to a report by Rightmove plc. Rightmove is Britain's most-used property website.

London was overtaken by Monaco as the world's most expensive location for luxury homes in the second quarter as banks slash jobs and the prospect of lower bonuses discouraged buyers. Average prices for houses and apartments in London's nine most expensive neighbourhoods fell for the first time in five years in August, an index compiled by Knight Frank showed.

Banks may cut 62,000 jobs in London by the end of 2009, reducing employment in the industry to the lowest level in more than a decade as the credit crisis worsens, the Centre for Economics and Business Research said in an Oct 13 report. Bonuses for this year will probably slump by 60 per cent to &pound3.6 billion, the CEBR estimates.

HSBC Holdings plc, Europe's largest bank by market value, is cutting about 550 UK jobs and Zurich-based UBS AG said on Oct 1 it would eliminate 2,000 positions from the European investment banking unit.

Banking and financial services in London account for about a fifth of the city's economy and employ 7 per cent of the workforce. London's financial-services industry contributed more than 4 per cent to the UK's &pound1.3 trillion economy, research firm Oxford Economics estimates.

'The industry drives a lot of the general economic well-being of London,' said John Forbes, head of UK real estate at PricewaterhouseCoopers LLP. 'If business volumes are substantially down and firms are reducing headcount, that has a knock-on effect right across the board.'

Lenders now won't issue a mortgage of more than 79 per cent of the value of the property, compared with 90 per cent a year ago, according to personal finance website Moneyfacts. The number of available mortgages has sunk to 3,123 from 15,599 at the peak of the market in July 2007.

The housing market needs to get worse to end the stalemate between sellers and buyers over price, said brokers covering south-west London, where values jumped fourfold since 1997 on demand from finance professionals priced out of Chelsea and Kensington.

'People are going to start distress sales, but we're not there yet,' said Simon Albertini, managing director of Friend & Falcke, a broker with offices in Clapham, Barnes and Fulham.

Pressure is already mounting as owners rent out their homes while holding out for a better price, creating a glut that has begun to depress rents across London, according to a survey of brokers by the Royal Institution of Chartered Surveyors.

'Maybe it takes four, five or six years for the market to bounce back,' said George Franks, area director for Douglas & Gordon in Battersea. 'Are the people who say they're going to rent out their homes prepared to be a landlord for that long?' Gregory Besterman, a broker in south-west London for 27 years who runs Fulham-based Sullivan Thomas, estimates the busy rental market shows there is 'two years of pent-up demand' from potential buyers.

'As ever, London is first to fall and first to recover,' said Jeff Doble, managing director of Dexters, a broker specialising in Putney, Chiswick and Richmond. 'Demand for property in London's suburbs is relentless and, regardless of the financial sector's woes, by 2012 prices will have recovered lost ground.' If the UK government's &pound500 billion package, presented on Oct 8, fails to revive mortgage-lending in time, Oliver Fisk and his partner may find themselves back where they were a year ago.

'It got to the point we thought we had to get on the ladder and buy a pokey flat for a ridiculous multiple so we can start thinking about starting a family,' he said. -- Bloomberg