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- [00:01]
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- [01:48]
Bloomberg Audio Studios Announcer
Bloomberg Audio Studios Podcasts Radio.
- [02:02]
Allegra Stratton
Welcome to in the City each week we unpack a story that's crucial to the world's financial capitals. I'm Allegra Stratton. So the UK housing market has been under pressure for some time, but now the data is catching up. In June, house prices recorded their sharpest drop in more than two years. That's according to Nationwide Building Society. The fall came as a surprise. Economists had actually expected a small uptick. This latest decline follows the government's move in April to raise transaction taxes. It's a change that's made life even harder for buyers already dealing with high borrowing costs. And if you zoom in on the luxury end of the market, the picture gets even bleaker. London's prime property sector, once a safe haven for global capital, is in a drawn out slide. Prices are now more than 20% below their peak, with no Real signs of a rebound.
- [02:57]
Marcus Ashworth
Welcome to the City of London.
- [02:59]
Allegra Stratton
The City of the City. The City of London. The next station is Bank. Please mind the gap between the train and the platform.
- [03:07]
Damien Shepherd
The financial heart of the country.
- [03:14]
Allegra Stratton
The City.
- [03:15]
Damien Shepherd
The City.
- [03:15]
Allegra Stratton
Welcome to in the City. Stand clear of the doors, please. So in this episode we want to dig into what's driving this UK housing slowdown and what it might tell us about where we're all heading next. To do this, I'm joined by Marcus Ashworth, who's a Bloomberg opinion columnist, and Damien shepherd, who's Bloomberg's European real estate reporter. It's brilliant to have you both here. Marcus, let's just start with you. There's nationwide numbers. As we said in the intro, they expected it to be a 1% increase, ended up being a 0.8% decline. Is it significant?
- [03:52]
Marcus Ashworth
We're all doomed. It is significant. And firstly, I don't believe that economists should try and estimate monthly housing numbers because it's literally pointless. And it shows you by this myth that really all you should be doing is maybe quarterly, but really on an annual basis where you guess it might be because the nationwide only looks at its own selection of mortgages and it's probably the most accurate in the context of a very inaccurate field of competitors. And I just think that the rush to fulfill completions before the April deadline, the stamp duty rose, it was only such a minor rise, it's had such an outsize effect where really it's been the most appallingly bad economic decision, I think from the Chancellor and it's created a vacuum and we're seeing the results of that now whereby you just literally the whole market has opened up and we have nothing to show for it because volumes. And this is the whole point, you need an active housing market. Doesn't matter if price is going down or prices going up, you need to be able to transact. And because stamp duty is such so high at the top end, no one's downsizing because it's ruinous for people though let's just go, hang on a second. I'm selling a four bedroom house, I'm picking up a two bedroom flat and I'm getting nothing out of it. So they don't. At the same time, I think to increase charges on first time buyers and at the lower end is just completely contrary to what this government allegedly is supposed to be about. Blah, blah, blah. This is the price. What I worry most about is not so much where house prices will go because they'll probably end up higher because they're not building any. So by definition demand supply but the lack of volume is seriously worrying because it's going to knock the whole economy because it hits everyone.
- [05:28]
Allegra Stratton
So the couple of things you said that just to pick up on before we bring Damien in. So just, just expand on your point about. It's the lack of any transactions. It's not really that all prices going up, are they going down? We completely take your point that they probably end up going up in the end but just, just explain for the listeners why it's the sort of total clogging up that's, that's.
- [05:46]
Marcus Ashworth
Well, we just have had. I think it's the worst number for something like 20 years. It's money more than 20 years. As far as monthly volumes for April, we've yet to see May but they're likely to be much better. It shows you your economy is ground to a halt which means that your solicitors, your builders, your plumbers, all the various ancillary trades, furniture suppliers, you name it, the whole lot is going to have a knock on effect later in the year because the world isn't churning and that is something which is, you know, because the costs of transaction are too high. They are ruinously high if you are a foreigner and buying a second home in this country it's 191 9% on top as a stamp duty charge. I mean it's just forget about it.
- [06:28]
Allegra Stratton
We don't want you tax.
- [06:29]
Marcus Ashworth
Yeah, it literally is and that let alone the non dom stuff. So it's the reason why and I'm sure Dame will come onto it. High end London has collapsed 15% for Kensington Chelsea in a year because in price terms volumes are non existent is because everyone is trying to sell and the non doms are the latest marginal seller and that is what's affecting everything.
- [06:50]
Allegra Stratton
Neat segue Damien, very neat indeed.
- [06:53]
Damien Shepherd
I'm still kind of chuckling at your opener there Marcus of we're all doomed. But if you speak to the London brokers they genuinely feel like they're doomed right now the top end of the market is in an absolute state. I mean you mentioned there, let alone non doms. I mean that is without question the biggest thing impacting the 5 million pound plus market. There's been debate around the numbers of how many non doms are genuinely leaving chat to the people selling those houses. They will tell you this is very real, this is happening. And the knock on effect on that side of the market is a complete lack of demand because the people trying to ship off their homes are trying to sell to people who will come under the exact same issues as those trying to leave the uk. It's leading to less transactions, a massive dip in prices. Price reductions are basically essential right now if you want to get anywhere near selling your house. There's one really, really interesting case study in Mayfair. Beautiful penthouse, went on the market for £100 million in 2023. About six months ago. It was knocked down to £85 million. A few weeks ago, it's down to £68 million. There's massive discounts going on. It is as close as you can get to a bloodbath at the top at the moment.
- [08:03]
Marcus Ashworth
Yeah, it's not just the top, unfortunately.
- [08:05]
Allegra Stratton
So just let's stay at the top. Because the other point that Marcus made, that you would think they'd listen to more in the treasury because obviously we have to assume that they're not. They're getting numbers that are telling them they should be worried, but because of the politics of the Labour Party, this sort of their comfort zone, I think all of us in this room and people listening will beg to differ. But I think what will worry them is this point around ancillary services. So the entertainment, the restaurants around all of these houses are where you have so many people in employment.
- [08:34]
Damien Shepherd
Exactly. And I mean it's completely across the board. I mean you've got to look at the geopolitical tensions as well as another risk factor for the top of the market. You know, there is hope building that interest rates will come down to a point that they need to. But the more these tensions rise, the more central banks might be cautious with their action as we move through 2025. So there is just this sea of issues impacting the top of the market. And as Marcus says, lower downtown, normal
- [09:01]
Allegra Stratton
bit of the market. And just before we sort of move on to what can be done and will anything be done and indeed will they try to do more? Because I think that would be the sort of race, the kind of bet at the moment, given the budget problems they are making worse for themselves every day. But just looking at your patch, Damian, who will buy a 5 million, you know, if you've got a surplus of 5 million pound plus houses. And the other thing I understand is the problem is that a lot of these non doms, they aren't under pressure to sell, they're wealthy. So they put them on the market sometimes at inflated rate values, but they don't care and they're just waiting to see, you know, does it however long it takes, they don't need the money, whereas normal families need the money. So they have a different pressure and strategic outlook when selling a house.
- [09:43]
Damien Shepherd
It's. Yeah, I mean, brokers have said to me it's the year of the domestic buyer. If you've got a rich Brit who can afford a property, £5 million plus, they're the ones you're looking to target at the moment. If you're looking to sell one of these homes, those coming in from overseas are looking at renting. There are brokers who are setting up rental divisions now in response to the huge demand for rental properties. Because these people coming into the uk, they just don't want to mess around with the tax environment. It's too uncertain and it's just not worth their time right now.
- [10:12]
Allegra Stratton
So we saw last night a huge climb down by the Prime Minister and put the politics of it to one side. There's a fiscal implication to not going ahead with your 5 billion pound welfare reforms and obviously that's on top of the U turn on winter fuel payments. So they're going to be looking to raise taxes in the autumn market.
- [10:27]
Marcus Ashworth
They are. And I think that's what was quite amusing to see Governor Bailey of the bank of England essentially sort of show that a bit of leg, saying that he's going to have to cut interest rates probably a bit more aggressively and certainly I think one's nailed on for August. But also the fact they may stop obliterating the long end of the gilt market by selling active gilts, but then the gilt market yield rose. Why? Because everyone knows, hang on a second, a 5 billion hold from welfare is actually going to extrapolate to probably 15 to maybe 20 billion of extra taxes in October and that makes life very difficult. So it's throwing it back onto Bailey. Does that make him want to hold off and do nothing or does it mean he's going to have to cut interest rates more? And I think it's the latter. And I think they're going to have to cut rates more, which we're already seeing two and five year swaps, which is this hedging tool that most mortgage providers at least reference, depending on the pots of cash they got. But some of this stuff they'll hedge straight away and therefore they lock in a rate and that's where their offer is for as long as demand lasts. And that is getting slightly better. It's the one good thing we have got going on the UK mortgage market. One, that the banks aren't foreclosing, two, that they are being flexible on lots of different types of extended maturities and various other different types of structuring on interest earning and things like that. But at the same time they're more aggressive on their mortgage office than the actual underlying government bond yields are. So in that sense we should be quite thankful that probably mortgages are going to get better, which may add some support on the broader market. I think the north of England, Wales and other parts of perhaps lower priced regions are still set to do fine. It is the wealthiest part of Europe, the London and Southeast corridor, all that area which is in a different world. Now normally it leads the market but it is, as Damian's very clearly explained, it's in a vacuum now whereby we will struggle and it doesn't really matter where interest rates are quite so much.
- [12:21]
Allegra Stratton
But when you talk about those 15 to 20 billion of tax rises that we're now assuming she has to go for, and obviously she had her, the Chancellor eliminated and the basic rate and income tax generally because of the pledges made during the campaign, which she may or may not roll back on. But, but that's very tricky politics for her too. You know what she left with and you know, you once upon a time, as a Labour Chancellor might think, well, I'll go for more property taxes, I
- [12:43]
Marcus Ashworth
think she goes on pensions, I think she goes on potential. I hope she said she's going to avoid capital gains tax, which again very much ties into the property aspect. I think pensions are the prime target and she'll just expand the bands of income tax. The fiscal drag, whether that gets her to the number she needs, I'm not sure. There are some rinky dinks you can do. I won't bore you about bank of England quantitative tightening, but there are some ways the OBR could be help. However. The Office for Budget Responsibility, her biggest friend, the one she's lashed herself to, have just come out and muttered the immortal words. They've been too optimistic on their economic outlook. If they revise down the economic outlook, the numbers, we're talking a CAS of maybe 30 plus billion and then the wheels are off and maybe then actually the OBR will do themselves out of business. But she'll have to cancel paying any
- [13:28]
Allegra Stratton
attention to them, Damien. There were reports, they've gone quiet now, but there were reports that she might, one of the U turns might end up being on the non dom. Is that something that sort of ripples through the sector? Too late, Marcus says. But was it something that was noticed by the people you speak to and was it something they believe they need?
- [13:46]
Damien Shepherd
Yeah, I Mean, I immediately rang one of the brokers who actually put to my attention that huge price drop in Mayfair after the news of the non dom U turn came out. She said it could stop the bleeding, but it's not going to change things overnight. I think you look at all the other sea of issues at the top of the market, this is sort of the focal point. So if there was a U turn, particularly on the 40% inheritance tax on the overseas assets, I mean that is just something thing that these non doms, they cannot swallow that if the inheritance tax side of things is looked at, then that is absolutely the part of the non doms debate which resonates the most when it comes to demand for the top end of the housing market. So I think it would be extremely interesting if that was looked at and I think that is almost just that kind of lifesaver for brokers and sellers at the moment that they're kind of looking at as will this be the point that could just about get a home on the market and sold.
- [14:39]
Allegra Stratton
Do you think inside the treasury they will be worried about the dynamics we're discussing here? Do you think that when they brought them through, they would have foreseen some of this? Is some of this desirable from a policy perspective? I'm trying to see it from their perspective.
- [14:56]
Damien Shepherd
I think they have to be. All of this talk about a wealth exodus is extremely concerning for the uk and like I said at the start of the conversation, there's been this debate around how deep this exodus has been. But when I'm speaking to the people selling these homes, it is really, really serious. And I think the fact that we're seeing reports of a potential U turn might hint to the fact that they are genuinely sitting down and speaking about this. And, you know, I think the action that will be taken will be telling.
- [15:23]
Allegra Stratton
Imagine also being a Treasury civil servant where you've put forward suggestions for it was Rachel Reeves last budget. You expect that they will be enacted, you expect that your budget is balanced because it will go through and you're now seeing a number of U turns that are extremely expensive. So you'll be thinking, well, what tax ris do I suggest for the next autumn? Because the ones I suggested for the last autumn got junked as soon as it got hot. So I think we will become a not a crisis, but a real sort of breakdown in trust between civil servants and the political class even further. Because if you're the ideas, the thought through policies you're proposing, you cannot be confident will last the Parliament exactly And
- [16:05]
Damien Shepherd
all of this talk about the political uncertainty, I mean that is the one word that the real estate industry doesn't like, uncertainty. I've already had conversations with people speaking about the next election and the rise of reform and this huge uncertainty about who is going to be in power in four or five years time. I mean all of these things are just combining to create uncertainty, which means less transactions and a dip in prices.
- [16:31]
Marcus Ashworth
And Mark is on the Crimea River. Well, first things first, on the property building side, they're not going to get to half. I don't even think they're going to get to half. And I think they know that now because the way the planning system is and the current run rate on building this year is, is at a, some like an eight year low. So it's going downhill. And planning permissions and the various other things are coming through the pipeline. So I would think they'll be petrified. I hope they'll be petrified. I mean literally Crimea river for them. But you know, they are because of the hubris they've come through putting through a whole bunch of stuff which has been battered away from 14 years of Tory government for good reason and she's managed to, to fall for, should we say, the treasury tricks. And now we're seeing it' on what we're talking about so far. But private school fees, you know, as you mentioned, non dom, everything they've touched and changed is blown up in their faces. So yeah, I imagine they should be petrified. I hope they are because really the whole point of the model following the OBR's fiscal rules is ruinous. They cannot go after employers because they've clearly hit the labor market. We can't measure the labor market, but everything anecdotal is showing us. So the ONS is dysfunctional, the obr, therefore by definition the numbers it's getting through is dysfunctional. I think the bank of England is equally so you have a situation, all the sort of organs of state are failing and the leadership at the top is trying to enact a plan which has fallen apart at first contact with the enemy. And that makes it very worrying. What they have done is they have moved the economy, the spread, the fiscal splurge they've done on the public sector at the expense of the private sector. The public sector.
- [17:59]
Allegra Stratton
This is what they said they wouldn't do.
- [18:00]
Marcus Ashworth
Well, they said we will be the government. That's exactly what they've got ahead. And the public sector is taking years and may not even come by the time they end this Parliament certainly on house billing fruit instance. But the private sector is getting hit immediately and they're the ones who pay for it. And that's the Trouble you're seeing GDP may held up at 1% or something pathetic. But the reality is the private sector shrinking and that is what's going to stop, unfortunately.
- [18:25]
Allegra Stratton
Any more, I suppose the sort of the counter to a lot of your very robust excellent points is that a lot of this direction of travel of a larger state and greater expenditure on public and private was something that the Conservative government began and that we have an electorate, all of us in included in this podcast studio that wants more and more and more. And so in the absence of somebody saying we have to do less as the state and you've actually seen an increase in the last six months with the need to increase defense spending so you're seeing greater demands.
- [18:59]
Marcus Ashworth
Buying American jets, you mean? Yeah, yeah.
- [19:03]
Allegra Stratton
Or making our own submarines as the Prime Minister valiantly says with the direction of travel was begun before Rachel Reeves and Keir Starmer. They have however added to that expenditure and I think, I suppose the question is given lots of western governments are increasing taxes and are increasing expenditure. What are the rights? What would be the taxes? It sounds like pensions. You think some.
- [19:26]
Marcus Ashworth
Well, pensions are the one thing they missed out on or one of the few things they missed out on in October. Everyone expected. Myself I shall just dust down the ones I wrote in October saying this is what they're going to kill and rerun them because the ones that they they stopped doing but clearly had done some road testing on they will have to do again I think this time for real this October.
- [19:46]
Allegra Stratton
Does it raise enough?
- [19:47]
Marcus Ashworth
Well, I mean again it depends how big the gap is. Depends. There's a few other things they can pull out of the far. They've already rigged the numbers by changing to a thing called persniffle. But basically they can move the goalpost again and I'm sure they will have to. So there's lots of things that can be done, none of them very pleasant. But I mean I would say fiscal drag is an obvious cutting the pension allowances.
- [20:08]
Allegra Stratton
Did you see the story the other day on Bloomberg that the number of higher rate taxpayers has doubled because of fiscal drag?
- [20:12]
Marcus Ashworth
Well, no doubt we'll continue. That's the one good thing for housing because we're paying all the civil servants more and the various different parts of the sort of quango world, we're unfortunately having to tax the rest of employers through national insurance contributions more net. Net net. But the people who can afford to buy take a mortgage out are relatively getting paid better, the civil service, so hopefully they'll buy more houses.
- [20:33]
Allegra Stratton
Damien, what is the thing that the people you speak to would like? What makes this better or is it gone too far?
- [20:40]
Damien Shepherd
Let's u turn on non doms, that's what they'll say. The inheritance tax that these people have to pay on their overseas assets is absolutely too much for them to swallow. To allow the top end of the housing market to function in a healthy manner, I think a decline in rates would be helpful. But the top end of the market is driven pretty much on sentiment on the headlines that these top end buyers and sellers see. So I think that absolutely it's just hard to get away from the non dom's conversation and I think the fact that it's hard to get away from it shows why Reeves is clearly making some considerations right now.
- [21:16]
Marcus Ashworth
And we have to cut stamp duty, but that's the stamp duty is a huge issue for everyone. The non dom thing is vital but at the same time they can't do
- [21:24]
Allegra Stratton
that though, can they?
- [21:24]
Marcus Ashworth
Well, it's 15 billion for them but the point is if that 15 billion on a high volume market goes to 10 billion on a low volume market, that we lose both ways because the knock on effect of what you've done to your housing market in the overall economy. So at some point they might have to bite the bullet on that to realize in a sort of multiplier effect or a monetary way of going about it, that Keynesian doesn't work necessarily in this particular instance and cutting taxes is actually the best way of growing the economy.
- [21:52]
Allegra Stratton
Obviously a year ago we're coming up for the one year anniversary of Keir Starmer's government on Saturday and they came in and there was fanfare around doing things differently. And to your point earlier, Damian, ending the uncertainty and so on, is it the view of the people you speak to that that has not happened?
- [22:10]
Damien Shepherd
I think so. It's just the way that the housing market is playing out right now is it's pretty negative. I mean sort of lower down in the kind of 500,000 to 1 million ballpark, you know, things are playing out in a more functional manner. But I think while everything is this uncertain, this unhealthy in terms of low transactions, huge price reductions, people aren't happy, brokers aren't getting business, there's a lot of pressure on the government to just do something to start to stimulate deals again.
- [22:43]
Allegra Stratton
Thanks for listening to this episode of in the City from Bloomberg it was hosted by me, Alegre Stratton produced by Sama Saadi, Moses Andam and Tala Ahmadi. Brendan Francis Newnham is our Executive Producer and special thanks to Marcus Ashworth and Damien Shepherd. Please subscribe, rate and review wherever you listen to podcasts.
- [23:04]
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