Friday, 24 May 2013

Foreign Buyers and the London Property Market

I'm increasingly puzzled by reporting of the London housing market and the role of foreign buyers. Is it true that London's house price growth is being driven by demand from foreigners attracted to the market by the low value of the pound?

There seem to be two versions of this story going around.

1) The low value of the pound is encouraging foreigners to buy lots of prime London property (i.e. housing worth more than £2m) driving up prices across London as a whole. The first part of this argument appears to be underpinned by the data - foreigners are behind half of the £2m+ home sales in London. But let's put these figures in to perspective using numbers from the land registry (taken from p. 13 of the latest HPI report). In January 2013 there were 77 houses worth more than £2m+ sold in London. Foreigners are buying a little more than half of these - let's say 40 to be generous.The total volume of house sales in January 2013 was 6,465. I am not an expert on housing markets, but I struggle to understand how around a half of 1% of London housing sales are driving the entire market. Once we look at increases, note that foreigners already accounted for nearly 50% last year so we are talking about perhaps 8 additional purchases per month. In contrast, Council of Mortgage Lender numbers show a 15% increase in first time buyers in London in 2012. That's an additional 6,000 buyers per year. Even with less money, you'd expect those 6,000 to be a much more important source of demand than the new foreign buyers. In short, I can see how foreigners are driving prime, but I'm not so sure that this drives the rest of the market. Which brings us to the next version of the story ...

2) It's not prime buyers, but total foreign demand that is pushing up prices. The data suggest that foreign buyers bought around £3bn worth of property in the London housing market last year. That's an increase of 25% from 2011 or around £0.75bn. This sounds more substantial until you think about the total value of property transactions in London. With average prices around £350,000 and average monthly sales around 7,500 a back of the envelope suggests total value of around £31bn. So the increase in foreign sales amounted to around 2.5% (0.75/31) which might make more difference than the prime property numbers (although presumably it includes them). That said, those extra 6,000 first time buyers mentioned above accounted for around £1.2bn (assuming an average first time sales price in London of around 200k - CML reports those numbers a little confusingly). And, of course, first time buyers aren't the only source of domestic demand.

In short, if I had to put my money anywhere, I'm inclined to think that domestic sources of demand (including from first time buyers) are much more important in understanding the overall London property market than a small number of rich foreigners.

[NB - I confess to pulling together these back of the envelope numbers pretty quickly; I have to say that they fit with my priors but I'd be very happy for pointers to a more careful analysis]