16 September 2013, Financial Times
The collapse of Lehman Brothers, five years ago this weekend, had an immediate impact on a UK property market already reeling from the failure of Northern Rock a year earlier.
By Tanya Powley
The longer-term impact has varied greatly by region, with many areas remaining stagnant, but with prime central London (PCL) recovering quickly. Even there, though, agents say that market dynamics have shifted, with many more foreign buyers and more cash transactions.
According to research from Dataloft and WA Ellis, the high-end London estate agent, sales transactions in England and Wales fell by 33 per cent in the 12 months following the collapse of the US investment bank, with gross lending plummeting by 48 per cent. Even central London didn’t escape, with average prices falling 17 per cent in nine months to £890 per sq foot.
The housing market was already in a fragile state in the lead-up to Lehman Brothers’ troubles, having been hit hard by the Northern Rock crisis in September 2007, and growing warnings of a US housing crash (house prices there peaked in late 2006).
Total housing transaction volumes dropped 22 per cent in September 2007 compared to the previous month, while mortgage lending fell by 20 per cent over the next 12 months, compared to the same period a year ago. Over the same period, prime central London housing saw sale activity drop by 43 per cent.
Camilla Dell of Black Brick, a buying agent, said: “When the financial crisis hit, market conditions changed almost overnight. It wasn’t just the collapse of Lehman but also other significant events at the same time, such as the Madoff scandal and collapse of AIG Insurance.” However, in the year from September 2008, sale activity started to pick up – by September 2009, PCL volumes were 5 per cent higher than the preceding year. In price terms, the bottom of the market was reached in early 2009. The global economic downturn and a falling pound saw anxious overseas investors snap up trophy homes in London at what for them were bargain prices. “With sterling weakened, prices fell and property vultures came to the forefront,” said Ms Dell.
As a result, average central London prices have risen almost 60 per cent since the bottom in March 2009 and are now 40 per cent above their previous peak. As much as £21bn has been spent on expensive central London properties since the collapse of Lehman. “While it appeared as though the market was going into free fall at the end of 2008, the impact of the weak pound against the euro and the dollar, coupled with a 17 per cent fall in PCL prices, helped to fuel the recovery,” said Richard Barber, partner and head of sales at WA Ellis.
Cash buyers also began to dominate the high end of the property market. In the second quarter of 2007, cash buyers in Kensington and Chelsea accounted for just 30 per cent of purchases. However, in the second quarter of this year the proportion was more than half.
Transaction volumes were hit last year after the government announced plans to increase stamp duty to 7 per cent for properties worth over £2m, and to 15 per cent for £2m-plus properties bought through a corporate structure. In the year following the increase, sales of properties between £2m and £3m fell by 19 per cent, while transactions between £1m and £2m rose by 6.4 per cent. The recurring threat of a “mansion tax” also played on buyers’ minds. Mr Barber said he has seen more evidence of wealth disbursement, with larger houses being sold to provide purchasing power for children and grandchildren as fears of mansion tax and capital gains tax on principal homes continue.