Correction of 50% for London house prices possible

As the effects of the vote by the UK people to leave the European Union still unfold, more and more economists say property will take a serious hit. A 50% cut in property prices in London is among the possibilities mentioned by one analyst.

The Brexit shock started to show with commercial property, where a number of funds halted redemptions by investors; it seems to be moving now to the housing sector.

Some real estate agency managers say that the weak pound will tempt foreign investors to load up on bargain residential properties in London, a prized location for global investors before the Brexit vote.

But a look at what the vote might mean for jobs in the financial sector and in the wider economy shows that things are not as simple as that.

Perhaps the most important negative effect of Brexit is the fact that there is a real danger that clearing of euro-denominated transactions will have to move to a European Union country. The UK will have to negotiate a “soft exit” to keep hold of such transactions, but in that case, it would not be able to curtain freedom of movement of EU citizens, an ambition that was at the heart of the vote.

The Financial Times has a story saying that the number of cuts in asking prices for London residential property jumped by more than 160% in the 12 days following the Brexit vote compared with the 12 days before. But this did not revive sales, with homes under offer and actual completions falling as well.

Marc Mozzi, a real estate analyst with Societe Generale, said that relocation of financial services managers outside of London towards other financial centres in the EU could lead to a severe downturn in residential property prices, and especially prime London home prices.

Relocation of managers outside the UK could lead to forced sales of property, which would create a glut of homes on the market. “Given the current ratio of prices to incomes in London, a price correction of even 40-50% in the most expensive London boroughs does not seem impossible,” Mozzi wrote in recent research.

In the second quarter of last year, the biggest part of property buyers in London’s expensive West End worked in finance, 44%, with media at 17%. Both these sectors are likely to be cutting down and/or relocating following Brexit.

London house prices are now 12x the average salary in London, double the long-term average of 6x, with London buyers needing to allocate around 40% to service their debts, compared with the long-term average of 34%, Mozzi added.

“We see a classic housing bubble in London and Brexit as the trigger for the correction,” he concluded.