Top-end UK house prices start to crash

Posted on 30 August 2010 with 1 comment from readers

Far from being immune to recession it is the top-end UK houses that are suffering most as the second wave of the UK house price downturn begins.

Estate agents report that high street banks are cutting valuations on one-million-pound-plus properties by up to 25 per cent. This is known in the real estate trade as the curse of downward valuations.

Price cuts

The Sunday Times cited the case of a $2.5 million family home in Wimbledon in South West London that a bank said was only worth $1.75 million, and therefore offered a far lower mortgage than the one being applied for. Another example in Knightsbridge, West London, saw a state-owned bank lopping 20 per cent off the value of a $10 million home.

Valuers blame an expected five per cent sales tax on homes worth more than $1.25 million from next April and the known rise in personal taxes to 50 per cent from next April.

It looks very much as though the upper end of the housing market is going to lead and not lag the next phase of the UK housing market correction. In the global financial crisis that began two years ago larger UK properties stood more immune to general price falls.

Now it appears reality has gone upmarket. House prices relative to incomes look very over stretched and rental yields are incredibly low, and only justified by crisis level mortgage rates.

With some economists forecasting base rates of eight per cent within two years house valuers have turned justifiably cautious on the outlook. Certainly the risk to mortgage rates is all stacked to the downside with no upside left on the kitchen table.

Besides just because top homes sailed through the previous global financial crisis does not guarantee immunity this time. The luxury end is arguably more exposed to a downturn than more basic homes that provide a roof over your head for less money.

Double dip forecast

Downsizing in a recession is more likely than upsizing, and surely a double dip recession is where the UK is heading. The new government’s Age of Austerity programme guarantees it.

But unfortunately that myopic shake-out-in-one-country is going to prove particularly painful as the whole global economy goes through a nasty double dip recession. The rich will be squeezed again, and some will not recover. This will compound the downturn in UK housing, especially at the overvalued top-end.

However, it is perfectly usual for the most overblown markets to correct the most, and that has to be the top-end of UK housing where the oil money and foreigners kept the market up along with ultra low interest rates. The new money came in too early and will now pay the price.