Guest Expert: Is This the Best Time to Buy Luxury Property in London?

Jeremy McGivern is Managing Director of Mercury Homesearch, London’s premier search agents and sales negotiatiors for luxury properties. This month, we once again invited him to share his insight on London’s high end property market.

• Fewer vendors are bringing their homes to market, with new instructions down 20% in Q4 2018 compared with the same period a year earlier. (Lonres)
• Those buying in US$ are paying on average 36% less in Q4 2018 than at the peak of the market in 2014. (Lonres)
• 370,000 first time buyers bought property in 2018 with a 4.9% increase in new lending – Mortgage Finance Gazette (I read all the interesting magazines…)
• Office take-up in London reached 14.61m sq ft last year, 14% higher than the long- term average and the highest level since 2014 according to Knight Frank.
• Average asking rents (residential) in London rose 2.1% to an all-time high of £2,034 in the last quarter of 2018 as available rental stock dropped 22% year on year… further rent increases of 4 per cent are predicted for 2019 (Rightmove)

Monetary Policy and Other Financial Heroin That Will Send London Property Prices To Stratospheric Highs

Another month goes by and our politicians once again don’t fail to disappoint.

If nothing else comes out of the Brexit shenanigans, I hope that people start to realise that the UK is successful despite our politicians and not because of them. This is due to clear rule of law and a political system that limits their ability to blunder.

For example, when May’s Brexit deal was soundly beaten, there wasn’t rioting in the streets, the army wasn’t ordered to force people to obey her and there was a very clear process that had to be followed to ensure that the process continued – the very next day.

In other words, as poorly handled as Brexit has been and as dull as it has become, the system works which is one of the many reasons that the U.K. is such an attractive place to do business, invest and to live.

Indeed, the latest immigration figures from the Office for National Statistics show that net migration from countries outside the EU has hit a 15 year high of 261,000. And while net migration from EU countries is back to levels seen in 2009 (which were hardly disastrous levels), the number of EU nationals applying for British citizenship rose 23% to a record of 48,000.

Of course, the other advantage of Brexit is that it has also highlighted how hopeless Jeremy Corbyn is and this has been reflected by his popularity ratings which have been plummeting. Quite an impressive feat when you look at how divided the Conservatives are… yet the real split is happening to Labour with 10 MP’s leaving due to anti-semitism, bullying and other issues that are rife in the party.

But less of politics. It is very easy to get bogged down in it because it is a subject that fascinates the press and takes up a disproportionate amount of airtime and newspaper space. Meanwhile, the world continues to spin despite the uncertainty.

In other words, Brexit is delaying decisions but it doesn’t mean that we are all going to down tools and give up. Indeed, the pent-up energy and money that is waiting to be deployed is really quite breath-taking.

And now time for a quick rant! There is still this absurd inclination of politicians to lambast the rich as if the money has somehow just fallen into our pockets or we have created wealth by some nefarious means (I don’t regard myself as particularly rich but the government has other ideas).

Not only is this frankly idiotic it also sends completely the wrong message, i.e. that creating wealth is bad. So, what politicians and the press are implicitly telling people is that if you strive for wealth then you must do something negative to achieve it.

As this a family publication I will not use the words that spring to mind, but give me strength.

Success does not come easily in any aspect of life – it comes through hard work, considered risk-taking, more often than not missing out on fun and family, while one strives for success.

Or to quote Pele who was nearly as good as me at football “Success is no accident. It is hard work, perseverance, learning, studying, sacrifice”.

This is what is not seen or understood by Corbyn and disgracefully many Conservative MP’s (or even worse they know it to be true but don’t think it will win them votes). I can’t remember who said it but “No-one fell to the top of the mountain”. And it’s not as if we are stealing money from others to create this wealth. It is not a zero-sum game.

And if you ask any private banker what interests the majority of their clients – philanthropy is right up there.

The irony is that if you win the lottery you are seen as a hero despite having done nothing to earn those millions, but if you have the temerity to earn millions through hard work and ingenuity, then you are a blight on society. How the hell does that work?

I don’t have the figures for the UK but I imagine they are not hugely dissimilar to the US – in 2018, 241 of the Forbes 400 made their fortunes from scratch. Another 36 made a large portion of their money even if also inheriting some wealth.

In other words, 71% of the ultra-rich got there through ambition, initiative, drive, grit, ingenuity, hard work and entrepreneurship. I expect the same is true for you.

And, this is what makes the UK & U.S. so attractive – despite the political rhetoric, we welcome entrepreneurs and business with open arms and provide a framework within which they can thrive.

Yes, Brexit causes complications and there are obstacles & bureaucracy that drive us all mad, but compared to what people have to endure in most other jurisdictions, these are mole hills not mountains.

Jeremy Corbyn might want to think about this, but so should the Tories who have disgracefully played along to the populist “the rich are criminals brigade”.

I could go on but we’d be here all year.

The good news is that while the press, politicians and the man and woman on the street focus on the negatives, there is actually more and more to be positive about even if it is not being highlighted in the press and every day conversation:

Global poverty has fallen to all time lows and the trend is continuing: “Over the last 25 years, more than a billion people have lifted themselves out of extreme poverty, and the global poverty rate is now lower than it ever has been in recorded history. This is one of the greatest achievements of our time.” World Bank Group President Jim Yong Kim

Now considering this is one of mankind’s greatest achievements it seems to have gone rather under-reported but, hey, good news doesn’t sell advertising space.

To put this into perspective, the percentage of the world living in extreme poverty has fallen from 35% in 1990 to just 10% in 2015. There is still more to do but if we can’t celebrate this then I give up. Of course, globalisation and capitalism have done nothing to help this as any honest socialist will tell you… they really are muppets. I could go on another rant, but I will refrain for now.

Of course, good news isn’t as eye-catching as bad news, which is why there is such a heavy bias towards negativity which is why the press frequently portrays situations as disastrous which patently aren’t. So, I rather enjoyed the following headline in Financial News – Investors flock to Frankfurt as Brexit bites in London.

Sounds as though London is getting battered by Frankfurt until you read further:

“Investment in Frankfurt and Berlin’s commercial property markets has almost doubled since the UK’s vote to leave the European Union, far outpacing the growth of London as the world’s biggest businesses flock to Germany to set up their post-Brexit European hubs.

According to figures from JLL, the property agency, the combined value of deals in Frankfurt hit $10.2bn in 2018, up 88% from 2016. Investment in Berlin jumped by more than 90%, to $7.1bn.

Growth in the UK capital, however, rose by half to $36.4bn, highlighting the strain placed on London by protracted Brexit negotiations and extended political turmoil.”

Well let’s evacuate now. Sound the alarms! London is doomed. There was “only” a 50% rise in investment in London which is still double what is happening in Frankfurt & Berlin combined.

Surely a more accurate headline would be “Frankfurt sees huge growth but London continues to dominate despite Brexit buffoonery”.

Fortunately, if you are aware of the negative bias which influences the man and woman in the street and can look beyond it, then you have a significant advantage especially when considering property in prime central London. Here are some more salient, but less well- reported facts:

1. According to Wealth X, the world’s ultra wealthy population, or those with $30m or more in net worth, which expanded strongly to 255,810 individuals.
2. The combined net worth of the ultra high net worth (UHNW) population increased by 16.3% to $31.5trn in 2017 (2018 figures are not available yet).
3. The number of ultra-wealthy women totalled just under 35,000, equivalent to a record-high share of 13.7%.
4. The global UHNW population is forecast to rise to 360,390 people by 2022, an increase of almost 105,00 compared with 2017. The level of UHNW wealth is projected to increase to $44.3trn, implying an additional $12.8trn of newly created wealth over the next five years.

So, the number of people who historically have been exactly the type of people to buy in prime central London has increased significantly (as has the number of high net worth individuals, i.e. those with $5m-$30m) and their wealth is increasing at a significant rate.

What affect do you think this will have on London property. Well:

“In the £15 million plus sector sales increased by 43% year on year to a total value of £2 billion in 2018 compared with £1.4 billion in the previous year.” (Savills)

So we have a situation where fewer and fewer people are living in poverty. Meanwhile more and more people are making more and more money in more jurisdictions than ever before. This is good news. Yes, more can be done to help those in war torn countries and the poorest areas of the world, but things are improving without question.

We have the largest amount of capital that the world has ever seen. Meanwhile the banks in the UK & US are well capitalised. However, the banks at this stage of the cycle are still heavily regulated, so lending is relatively restrained. This will change and will cause prices to surge higher as more credit is allowed into the system.

Indeed, there are already signs of this happening as last year the U.S. Congress voted through Trump’s amendments to the Dodd Frank Act. These were only a “watering-down” of the banking regulations but then this is how it always starts.

We will also find new and wonderful ways to allow more credit into the market and to monetise property. For example:

“A new stock exchange that will allow investors to invest in individual properties through share sales has been given approval by the UK financial regulator.

The team behind the International Property Securities Exchange said today that the Financial Conduct Authority had made the market a recognised investment exchange.

IPSX claims to be the world’s first regulated exchange dedicated to trading companies that own single real estate assets, a move it said “reimagines real estate investment and democratises access to the asset class for every type of investor”.

For property owners, the pitch is that a listing will release value from an asset without full sale of the building or, in the case of owner-occupiers, a sale-and-leaseback deal.” (Reporting from the BBC & Financial News)

We are also on the cusp of a new monetary experiment

One main worry for economists and policy makers is that central bank interest rates remain low so the concern is how well monetary policy would cope with any future recessions – after all rates can’t get much lower.

One small nation thinks it has found the answer – Bloomberg reports:

“One option could be electronic money issued in tandem with regular cash… Cash, which can be held interest free, offers a way around negative rates, but electronic money issued by a central bank can’t be stuffed under any mattress…

Dividing the monetary base into two separate currencies – cash and electronic money – could allow rates to be cut even deeper below zero. E money would pay whatever the policy rate is and cash would have an exchange rate against e-cash.

The key is the conversion rate since that would let cash depreciate at the same pace as the negative interest rate on e-money. Shops would also start advertising prices in e-money and cash separately. Cash would therefore be losing value in terms of goods and in terms of e- money and there would be no benefit to holding cash relative to bank deposits…

…this dual local currency system would allow the central bank to implement as negative an interest rate as necessary for countering a recession, without triggering any large substitutions into cash”.

Fortunately, only a crackpot dictatorship could come up with such an idea. It’s total madness. Oh, hang on, what’s that you say? Really? No, check your source again. Hell’s teeth.

I have just been informed by my assistant and the brains of the operation, Veronika, that this idea is actually the brainchild of International Monetary Fund (IMF). I was seriously about to sack her for gross incompetence for suggesting that this came from a credible economic source.

She quickly pointed out that the IMF is not a credible economic source! Ahh, that rapier-like Lithuanian insight and humour. You’re hired again!

Now negative interest rates may seem like a crackpot idea, but it is important because it shows that this property cycle is repeating just like all the others. Here is the basic anatomy of a property cycle:

Step 1 – There is a crash that marks the end of one cycle and marks the beginning of the next – yup 2008-2010 did a good job of that

Step 2 – Policy makers and politicians look for a scapegoat and blame the banks, which are hit with huge fines and banking regulations are hiked aggressively. The horse has bolted and this is a huge overreaction which exacerbates the crash, but policy makers look as though they have done something… (once again policymakers followed the script)

Step 3 – while hammering the banks, policy makers then help recapitalise the banks (yup)

Step 4 – London recovers first as the only people with any money during a liquidity crisis are the rich and London is where they want to be (yup)

Step 5 – London property prices takes off and leave the rest of the country behind because banks are now in a position to lend. However, the only people they can lend to (due to stricter banking regulations) are the rich as they are the best credit risks

Step 6 – Unaffordability issues raise their head. London plateaus or sees a fall in prices (which are minor compared to the price increases). The rest of the country starts to slowly narrow the gap in prices and the “end of London property” is a favourite newspaper headline

Step 7 – A recession or other “shock” takes place. In the last cycle think the dotcom crash and recession of 2001 plus the terrorist attacks in London and 9/11. This leads policymakers to take action that would have seemed impossible in the previous cycle, e.g. the Greenspan Put would have been impossible in the previous cycle, just as money printing in the early 1990’s would have been frowned upon as something that only unstable, developing countries would ever do…

Step 8 – banking regulations are relaxed because US & UK banks are well capitalised and politicians and policy makers want to be seen to be helping small businesses and the “man and woman in the street”. This leads to looser monetary policy and is the catalyst for the real boom in prices in the second half of the cycle.

The foundation for this boom is a much larger capital base, which combined with looser monetary policy means property prices will climb to higher levels than most observers think is possible.

This has been happening for centuries in both the U.K. & U.S. – yet in every cycle conventional wisdom will tell you that it will be different this time and that prices can’t go any higher… conventional wisdom will be wrong once again.

Step 9 – Prices continue higher. The economy seems to be doing well and policymakers pat themselves on the back for taming the economy and having everything under control.

Step 10 – Confidence goes through the roof (aka hubris). Prices soar in a mad frenzy and everyone wants a slice of the action. Weird and wonderful new ways to borrow money are created to allow everyone to buy property – think mortgage backed securities, ninja loans, self cert mortgages in the last cycle. The frenzy leads to looser credit checks and this begets huge fraud on individual and institutional levels, e.g. the pricing and credit ratings of mortgage backed securities (MBS) and Madoff, Stanford, etc.

Step 11 – The cracks begin to appear. Policy makers think they can control the issue (or are aware that they can’t but can’t be seen to be saying this so they tell everyone that everything is fine). Then we have a massive house price crash (caused by a land price crash) which causes a banking crisis.

Step 12 – Return to step 1 and repeat.

This has been happening for over 300 years in the UK and over 200 years in the U.S. and yet mainstream analysts and economists ignore the property cycle.

Admittedly what I have outlined above is a simplified version of events but it’s really all you need to know.

We are pretty much at stage 7. Banking regulations are still strict but the cycle is repeating as expected at this stage – what would have been regarded as insane monetary suggestions 20 years ago are now being seriously considered and banking regulations are being relaxed slowly, e.g. the amendments to the Dodd Frank Act last year. This is just the tip of the iceberg.

There also doesn’t have to be a full-blown recession – in 2001 the U.S. went into recession but the U.K didn’t.

At the moment, the doom-mongers focus on the increases in SDLT, changes to IHT and taxes for international buyers as well as buy to let taxation as reasons why London property is doomed.

And these are all seemingly sensible reasons for suggesting that prices can’t go higher (as is always the case), but none of these have changed the fundamental structure of the UK property market which is why the cycle will repeat like clockwork (in the last cycle the dotcom crash and terrorist attacks of 2001 were reasons not to buy property – there are always reasons not to take action…).

And the tax changes will undoubtedly deter some people from buying. But, because London offers such a variety of experiences and opportunities, it is more attractive to far more people than the relative few whose main focus is minimising their tax exposure.

The good news is that we are in the phase of this cycle when most people are sitting on the side lines because they are being influenced by the press whose default policy is to focus on worst case scenarios – by the way the headline writers are just doing their jobs as it has been proven that humans are more concerned about loss than gain.

However, our primordial fear of loss is actually detrimental in the modern world of abundance.

This creates an opportunity for you.

Of course, conventional wisdom will tell you that now is not a good time to buy; there are too many risks, too many unknowns. But this is completely twisted thinking. The fact that everyone can see the risks of Brexit means that we have not seen money wade blindly into the market – instead it sits idle in bank accounts much to the chagrin of policy makers – hence the idea of negative interest rates (the other option being mooted is higher inflation targets – in other words they want you to spend and if you don’t they will actively devalue your cash).

The irony is that although they are right to want people to spend at this stage of the cycle people won’t despite HAVING THE MONEY. So the authorities will make it more attractive to spend by reducing regulations and using other incentives.

These will work, but it will mean that more credit than necessary will be created and, consequently, we will see prices move higher on not only increased money supply but also an acceleration in the velocity of money due to overconfidence founded on the financial heroin.

Then when “certainty” rules and everything seems “safe” the market will explode higher in a hubristic, Icarus-style flight to the sun… and then everything will crash in spectacular style.

In other words, the time to buy is exactly when things do not seem safe like now, because there is already a huge safety net in the fact that individuals (at the top end of the market) have lots of money, the banks in the UK & US have more money than they know what to do with and central banks actually have more options to add to the money supply than is widely recognised.

Currently, this money is not being employed by the majority because the predominant emotion is still FEAR.
Compare this with 2007. GREED ruled. The fear of missing out on further gains enticed people into taking out too much debt – be that banks, businesses or individuals. Not only was everyone fully invested but they were leveraged up to the eyeballs. Why? Because it was safe – it was different this time – prices did only go up and we had a new paradigm!

Or in the immortal words of Charles Prince, then CEO of CitiGroup,: “As long as the music is playing, you’ve got to get up and dance… we’re still dancing.” (July 2007).

This has been happening for millenia. You can look at 2008, the dotcom crash all the way back to the South Sea Bubble, Tulipmania and beyond.

It is only when things seem safe and everyone is telling you that property (or any investment) is a sure-fire winner that it is time to head in the opposite direction. Yes, be fearful when others are greedy. Right now, you want to be greedy as everyone is fearful.

It’s not easy to do but, this is what the papers and popular opinion were saying in the last cycle.

2000 – “Housing-market experts, from estate agents on the ground to analysts in the high-rise city banks, are agreed on one thing: this is more than the annual summer slowdown. House- price inflation has dropped considerably and, in some pockets of the capital – usually areas on the fringes of more fashionable addresses – where people were paying silly prices for bad houses, properties are indeed worth up to 10 to 15 per cent less than they were six months ago.” The Daily Telegraph

2001 – “The house price indices are for once agreed: prices are slipping as the effects of recession take hold. Suddenly, the telephone-number price-tags of rather ordinary two- bedroom flats are beginning to look ridiculous.” The Daily Telegraph

2002 – “The top of the property market has been in trouble for some time… Property in some outer London boroughs now changes hands at phenomenal multiples of average local earnings – the prices being pushed up by a relatively small number of people driven out of expensive parts of the city.
In Bromley, for example, house prices are now 10.4 times local earnings” The Daily Telegraph

2003 – “He [Roger Bootle] said: ‘The message is clear. Houses are now so over-valued that a prolonged period of falling prices is on the cards.’ … Some London ‘hot spots’ have already seen prices marked down in recent weeks, which has been attributed to lower City bonuses and Stock Market uncertainties.” The Daily Mail 1st March 2003

2005 – “After five years of unstoppable price rises, the housing market has been showing signs of jitters.” BBC

Prices then exploded higher going up 25-30% per annum in 2006 and 2007. In other words, they couldn’t have got it more wrong. But this negative news is your friend.

The lows of this cycle have been and gone – that was 2009/2010. We will not see those prices again. However, just because you have missed the lows doesn’t mean this is a bad time to buy: 1993/94 was the bottom of the last cycle, but that didn’t make 1995-2005 bad times to have bought property in London despite the fact that popular opinion would have told you otherwise.

I was told I was mad for founding Mercury Homesearch in 2001 because prices were “too high”. However, it was only when popular opinion changed in late 2005 and everyone including the newspapers were telling you to borrow whatever you could to buy property that you wanted to consider your portfolio and pay down debt.

Of course, this is easier said than done because we are herd animals, so our ingrained psychological biases don’t allow us to do this easily. But if you separate yourself from the herd and take action now, probability and history suggest that you will massively outperform.

Of course, this doesn’t mean that you should rush to your nearest estate agent.

You must be selective. As the members of Mercury Homesearch will tell you, I have invented the worst business model ever as I spend the majority of my time advising them not to buy property.

And as absurd as this sounds, it is the correct advice, because prime London property is not a bullet-proof investment and nor does all property perform in the same way. I know I repeat this statistic ad nauseam, but it is so important that I make no apologies:

Research by Savills has shown that between 2005 and 2013 the top decile of properties in Prime Central London increased in price 190% while the bottom 10% increased 63%

This is the equivalent of you and another buyer each acquiring a property for, say, £2m and it being worth £5.8m or £3.26m. Which would you prefer and who do you think would be more concerned about any price falls?

Now, you are not going to see these returns in every area and price range but there will be significant differences in performance, which is why we adhere to our “best in breed” strategy. This applies for homes as well as investments.

The choice is yours.

1. Follow the herd and buy at the same time as everyone else while using the same methods to find property that the average man or woman on the street usesOR
2. Follow the advice of Warren Buffett, the world’s most successful investor and 3rd richest man on the planet, and be greedy while others are fearful. Meanwhile, you want to use the proven strategies and tactics – which most buyers ignore – to acquire London’s finest homes and investment opportunities

Is it unreasonable to suggest that doing what everyone else does is not the best course of action and will not give you an advantage over other buyers?

So, if you want to achieve better results, simply request a complimentary copy of my book, The Insider’s Guide To Acquiring Luxury Property in London by emailing [email protected] or you can call 02034578855 (+442034578855 from outside the UK).

Amongst other things, the book will show you how to source off-market properties and there are over 30 pages of negotiation techniques which I have used to save clients millions in individual transactions (don’t worry if you don’t have a multi-million pound budget, we also use them to save significant sums when negotiating £1m transactions).

This is not mere theory. These are actionable strategies and tactics that I have used to help some of the most successful families and business people in the world. So, if you think this information would help you, simply request a complimentary copy of The Insider’s Guide To Acquiring Luxury Property in London by emailing [email protected] or you can call 02034578855 (+442034578855 from outside the UK).

Best regards, Jeremy McGivern