Spin won't save the London property market

Here are the highlights of the latest London Residential Review from Frank Knight. The report makes three points; the first is based on the facts; the second ignores the facts; and the third is wishful thinking.

Prices are continuing to fall in the capital. In some locations they are already 20% down on a year ago, although 10% is the general tone. Transaction volumes are 50% to 60% lower over the same period, and the market paralysis shows little sign of abating.

The super-prime market (£10m+) has seen rising values until recently. While our view is that price growth in this sector has now run out of steam, transaction volumes should at least continue to hold up compared with the wider market.

Rental growth has slowed recently and in several areas has turned negative. Significantly lower capital values, and relatively stable rents, will lead to improved investment yields for those looking to enter the market in 2009. There are lots of bargain hunters circling the market, but for now most are “just looking”.

The first point needs little comment. The London market is crashing and everyone knows it. The numbers are stark; prices down 10-20 percent, with volumes down 50-60 percent. That means grim pickings for london estate agents.

The second point recognises that the "super-prime" market is on the turn. However, Frank Knight thinks that volumes will continue to hold up. Dream on, Frank. This crash is all about wealth compression. If you will allow me to overload on adjectives, the rich are getting poorer much faster than the poor are getting poorer. The rich have just seem massive falls in equity prices; and those high end sales neeed buyers who can really deliver the cash on settlement day. That means the wealthy need to have some serious wealth to make the transaction go through.

As for the third point, next year's bargain hunter will be a superprime loser in 2010. Recession means lower incomes and more unemployment; rental growth follows wage growth, and the numbers are going the wrong way for buy-to-let.

Besides, quoting rental yield is a little misleading, what really matters is total yield, which is rents plus capital gain/loss. Putting it in simplier terms, why would anyone want to own a property when rental growth is likely to be flat or even negative, while the price of the asset is almost certainly going to fall. It is a template for losing money.