Will this be the start of a slowdown in copper prices?
London House Prices Fall, Prompting Economic Slowdown 2005-08-16 05:23 (New York)
By Laura Humble
Aug. 16 (Bloomberg) -- Christian Holland, a fund manager at
Cavendish Asset Management in London, set the asking price for his
three-bedroom house in the southwest of the U.K. capital at
519,000 pounds ($940,000). Four months and two price cuts later,
he's happy to accept an even lower offer.
``It's for 450,000 and I'm taking it,' says Holland, 37, of
the single bid he's received. ``The market is dreadful.'
London house prices, which more than tripled in the 10 years
through June 2004, are falling, and they may bring a halt to the
U.K.'s economic expansion under Prime Minister Tony Blair.
Countrywide Plc, Britain's largest real estate company, has closed
offices and cut its workforce. Developers such as George Wimpey
Plc and Taylor Woodrow Plc are offering soccer tickets and
property tax payments to entice new sales.
The Bank of England, led by Governor Mervyn King, is
responsible for the slowdown, says Holger Schmieding, 47, co-head
of European economics at Bank of America Corp. in London.
``The bank hiked rates aggressively in late 2003 and early
2004 to cool down an economic boom fueled by an explosive rise in
house prices, and clearly attained that goal,' says Schmieding.
Tomorrow, the bank releases the minutes of the Monetary
Policy Committee's Aug. 3-4 meeting, when it decided to trim the
benchmark interest rate by a quarter-point, to 4.5 percent. The
minutes may reveal the extent of any divisions among the
committee's nine members on the state of the housing market and
its impact on the U.K. economy. The bank had raised its rate five
times in the 10 months to August 2004, to 4.75 percent, the
highest in the Group of Seven industrialized nations.
Growth Slows
In the second quarter, the U.K. grew an annual 1.7 percent,
the slowest pace in 12 years. On Aug. 10, the bank projected that
Europe's second-largest economy will expand about 2 percent in
2005, less than the 2.5 percent it forecast in May. Growth will
accelerate to about 3 percent by the end of 2006, it said.
King said at a London press conference announcing the figures
that the property slowdown had contributed to weaker consumer
spending, which in turn had slowed growth.
``We have always had a link between house prices and consumer
spending and some of the slowdown in consumption undoubtedly can
be explained by lower rates of house-price inflation,' he said.
Yesterday, the London Retail Consortium and accounting firm
KPMG International said sales in stores open at least a year in
the center of the capital dropped 8.9 percent in July following
the terrorist attacks on public transport. The retail slump in
London was larger than the 1.9 percent drop recorded for the U.K.
as a whole by the British Retail Consortium on Aug. 9.
Sales Slide
U.K. companies dependent on the housing market are feeling
the effects of the slowdown. London-based Wimpey, the U.K.'s
biggest homebuilder by market value, said on July 5 that weekly
sales in the first half slid 18 percent, blaming higher borrowing
costs. Wimpey shares have dropped 9.4 percent in the past six
months, to 395.75 pence as of 9:56 a.m. in London. The Bloomberg
Europe Home Builders Index, whose nine members are all British,
has fallen 6.7 percent in the same period.
In the 12 months through June, house prices in the capital
fell 2.4 percent, compared with a 3.7 percent gain elsewhere in
the U.K., according to figures from Edinburgh-based HBOS Plc, the
nation's largest mortgage lender. HBOS says London property values
are a leading indicator for the $6 trillion U.K. property market
as a whole.
``London tends to lead the housing market cycle,' says HBOS
Chief Economist Martin Ellis, 44. ``Prices there tend to go up
first and more than the rest of the country when rates fall and
the opposite when they rise.'
King's Apartment
In the U.K. as a whole, the expectation that the Bank of
England would lower interest rates may have helped stabilize the
housing market last month, a report from the Royal Institution of
Chartered Surveyors showed today. U.K. house prices fell at the
slowest pace in five months in July, it said.
Still, prices may ``drop again over the coming three
months,' after having fallen for a year, RICS said. A separate
report from the U.K. Office for National Statistics in London also
showed today that inflation reached 2.3 percent last month, the
highest since records began in 1997, damping expectations of
further rate cuts.
The value of residential dwellings accounts for 55 percent of
wealth in the U.K., or 3.2 trillion pounds, according to the ONS.
The U.K. economy has grown for 52 straight quarters as rising home
values contributed to a boost in consumer spending.
Expensive London
King, 57, has personally benefited from the London housing
boom. He purchased a two-bedroom flat in Notting Hill, west
London, in June 1989, according to the U.K. Land Registry. Since
then, average prices for properties within 300 meters of his have
jumped to almost 1 million pounds, from 320,000 pounds, according
to OurProperty.co.uk, an independent property Web site for
homebuyers that tracks U.K. house values. Gary Hunt, a Bank of
England spokesman, wouldn't comment.
London is the world's third-most-expensive city, according to
a June survey by Mercer Human Resource Consulting, based on
property costs and the price of everyday items. Only Tokyo and
Osaka, Japan, ranked higher in the survey of 144 cities.
Average house prices in London gained 215 percent in the
decade through June 2004, just before the last interest-rate
increase. In contrast, the average price in Manhattan rose 164
percent during the same period.
Homebuilders like Wimpey, who are feeling the market chill,
are offering more inducements to shift new properties. Average
prices of newly built homes in London have fallen 24 percent this
year, to 530,293 pounds in July, according to Smartnewhomes.com,
which advertises the residential properties for 85 percent of U.K.
developers.
Free Soccer Tickets
``Prices are going nowhere and homebuilders are using a whole
range of incentives to try and draw people in -- free carpets,
furniture, legal fees, deposits -- you name it,' says Mark
Hughes, 34, a Liverpool-based Numis Securities analyst who covers
20 U.K. homebuilders.
Wimpey and Taylor Woodrow, the third-biggest U.K.
homebuilder, have joined to construct the 467-unit Vision 7
apartment complex in north London near a new stadium being built
for Arsenal, last season's winners of the English Football
Association Cup.
On the first weekend of sales, the developers offered early
purchasers a free 2006 Arsenal season ticket worth as much as
2,500 pounds. Neil Majithea, a Vision 7 salesman, says 216
apartments are still available.
``In this market, the truth is you cannot sell anything from
the mid-market upwards without incentives,' Malcolm Harris, chief
executive of U.K. homebuilder Bovis Homes Group Plc, told analysts
on a conference call on July 14.
`Easy Mover' Deals
In advertisements in London's Evening Standard and Metro
newspapers, Wimpey is also offering an ``easy mover' promotion at
selected developments. The company may waive mortgage-arrangement
and legal fees, pay property taxes and require only half the
normal deposit of 10 percent of the purchase price. Carly Slassor,
a Wimpey spokeswoman, declined to comment on the company's
promotions.
David Miles, chief U.K. economist at Morgan Stanley in
London, says property values in London may fall further.
``The housing market slowdown is well under way, but for
house prices, in particular, it may have a long way to go,' says
Miles, 45. He estimates that U.K. house values will drop by 5
percent this year.
Further declines will accelerate the crisis for real estate
agents, says Harry Hill, chief executive of real-estate agency
chain Countrywide.
``Agencies are either going out of business, operating at a
loss, or having to cut costs dramatically,' says Hill, 57.
``Volumes are down to a level that we have only seen once or twice
since World War II.'
Shuttered Offices
Countrywide on Aug. 11 said first-half net income slid 84
percent from a year earlier, to 3.2 million pounds. It has shut 33
of its almost 1,000 branches and cut 500 employees since the first
half last year, according to Hill. The company's shares have
fallen 4.8 percent in the past six months, to 339.75 pence.
Just last year, the world's most expensive home was sold in
London when steel industry billionaire Lakshmi Mittal, 55, bought
a mansion in Kensington Palace Gardens for 70 million pounds. The
most expensive house currently for sale in Britain, the seven-
bedroom north London property owned by Turkish ceramics
entrepreneur Halis Toprak, hasn't found a buyer willing to meet
its 50 million-pound price tag since it went on the market in May.
The number of homes in greater London that have been sold for
more than 1 million pounds fell 14 percent in the first quarter of
2005, compared with the same period last year, according to the
Land Registry.
More Realistic Prices
``Vendors are going to have to be more realistic about
prices,' says Richard Donnell, 36, head of residential research
at Savills Plc in London. ``We are going to see a prolonged period
of underperformance.'
Juergen Birnbaum, 37, a London-based credit trader for HVB
Group, Germany's second-largest bank, bought his first apartment
in 1998 in the Docklands, a financial district in the southeast of
the capital, for 78,000 pounds. When he sold the property three
years later, he more than doubled his investment. He used the
money to buy two more properties, an apartment and a house in the
same area, both of which he's now struggling to sell.
The apartment hasn't found a buyer after three months on the
market, even though he's cut the price by 10,000 pounds to 285,000
pounds. The house, on sale for 250,000 pounds, has attracted an
offer of 247,500 pounds that he's going to accept.
``It's definitely noticeable that people are more cautious,'
Birnbaum says. ``I am happy to take the offer on the house. Things
may get worse down the line.'
Olympic Hopes
Amid the gloom, one area of London is defying the declining
trend. The east London area of Stratford will be the site of the
2012 Olympic Games, which were awarded to London against
bookmakers' expectations on July 6. About 9,000 new homes will be
built in the area around the proposed Olympic Park in Stratford,
according to the London Development Agency.
Real estate agent Barbara Goldsmith of Stratford Properties
says prices in the area have gone up 10 percent to 15 percent
since the Olympics announcement.
``There's no question that it has boosted the market,' says
Goldsmith, 47. ``People can't get anything in Stratford now,
except for very high priced new apartments.'
Waiting for 2012 isn't an option for today's home sellers,
Holland says. Before finding a buyer for his Chiswick property, he
tested the rental market and was surprised to find potential
tenants trying to bargain down the price.
``I had an offer on rent that wouldn't even cover the
mortgage,' he says. ``I have never even heard of offers on rent
before.'
--With reporting by Brian McGee in London and Kathleen M. Howley
in Boston. Editors: Ellis, Swardson, Henry, Gregori, Hamade,
Atkinson |
