London's Housing Slump Discourages First-Time Buyers

By Svenja O'Donnell and Simon Packard

Oct. 20 (Bloomberg) -- Oliver Fisk and his girlfriend have been hunting for a one-bedroom apartment in London for four years and they're further away than ever from getting onto the property ladder.

``We're definitely holding out for a bit longer, especially with the things that are going on with the banks,'' the 28-year- old information-technology specialist said. Fisk has moved in with his girlfriend's parents to save for the 21 percent deposit that most lenders now insist on.

The steepest drop in London home prices in 16 years is deterring prospective buyers and worsening the rout in the property market. Higher mortgage rates mean the first-time buyer of a two- bedroom home is spending 12 percent more per week than a year ago, said Richard Donnell, director of research at property data company Hometrack. And that doesn't take into account higher down-payments.

The number of loans granted to first-time buyers fell an annual 55 percent in August to 15,600, according to the Council of Mortgage Lenders, whose members provide about 98 percent of all U.K. mortgages. That was the lowest since the CML began compiling the data in 2000. The typical loan to such purchasers fell to 106,754 pounds ($184,631), the lowest since May 2006.

Borrowers took loans that accounted for 84 percent of the value of the property and 3.18 times their income, down from 90 percent and 3.39, respectively, in August 2007.

Banking Crisis

The property slump has been exacerbated by the worst banking crisis since the Great Depression, which has caused demand from the 400,000 people who work for banks, insurers and other financial-services companies to collapse.

Residential property prices in London probably will fall about 14 percent this year, with the biggest declines in homes costing about 1 million pounds or more, Knight Frank LLP estimates. In 2009, houses and apartments will lose another 11 percent of their value, according to Knight Frank, Europe's biggest closely held property broker by revenue.

``It is futile at the moment to try and forecast the scale of house-price declines,'' said Michael Coogan, director general of the Council of Mortgage Lenders, which has a membership of 158 banks, building societies, and other mortgage lenders, according to its Web site. ``Some of our members are forecasting up to 25 percent falls from peak to trough.''

The rising cost of financing caused U.K. home sales to fall to the lowest in at least three decades in the three months through September, the Royal Institution of Chartered Surveyors said Oct. 14. The biggest decline was in London, where brokers and surveyors sold an average of 8.3 homes in the quarter, compared with 11.5 for the whole country.

`Ducking and Diving'

``We're just ducking and diving,'' said Guive Emami, a broker at Savills Plc in East London. ``I had a client, a lawyer on 50,000 pounds ($86,580) a year and with an 80,000-pound deposit saved up, who struggled to find a mortgage.''

Fisk, who was living in Clapham, looked at apartments across southwest and was prepared to spend as much as 150,000 pounds. He gave up the search at the end of last year and is in no rush to start house-hunting again.

``Things are only going to get worse,'' Fisk said.

Prices for apartments and houses across London fell 9.4 percent in the third quarter from a year earlier, Nationwide Building Society said Oct. 2. That was the biggest decline since 1992. The largest drop was in the borough of Hammersmith and Fulham in west London, where prices fell 13 percent.

In October, asking prices for homes in London fell 2 percent from a year ago, according to a report by Rightmove Plc today. Rightmove is Britain's most-used property Web site.

London was overtaken by Monaco as the world's most expensive location for luxury homes in the second quarter as banks slash jobs and the prospect of lower bonuses discouraged buyers. Average prices for houses and apartments in London's nine most expensive neighborhoods fell for the first time in five years in August, an index compiled by Knight Frank showed.

Job Cuts

Banks may cut 62,000 jobs in London by the end of 2009, reducing employment in the industry to the lowest level in more than a decade as the credit crisis worsens, the Centre for Economics and Business Research said in an Oct. 13 report. Bonuses for this year will probably slump by 60 percent to 3.6 billion pounds, the CEBR estimates.

HSBC Holdings Plc, Europe's largest bank by market value, is cutting about 550 U.K. jobs and Zurich-based UBS AG said Oct. 1 it would eliminate 2,000 positions from the European investment banking unit.

Banking and financial services in London account for about a fifth of the city's economy and employ 7 percent of the workforce. London's financial-services industry contributed more than 4 percent to the U.K.'s 1.3 trillion-pound economy, research firm Oxford Economics estimates.

Market Stalemate

``The industry drives a lot of the general economic well- being of London,'' said John Forbes, head of U.K. real estate at PricewaterhouseCoopers LLP. ``If business volumes are substantially down and firms are reducing headcount, that has a knock-on effect right across the board.''

Lenders now won't issue a mortgage of more than 79 percent of the value of the property, compared with 90 percent a year ago, according to personal finance Web site Moneyfacts. The number of available mortgages has sunk to 3,123 from 15,599 at the peak of the market in July 2007.

The housing market needs to get worse to end the stalemate between sellers and buyers over price, said brokers covering south west London, where values jumped fourfold since 1997 on demand from finance professionals priced out of Chelsea and Kensington.

``People are going to start distress sales, but we're not there yet,'' said Simon Albertini, managing director of Friend & Falcke, a broker with offices in Clapham, Barnes and Fulham.

West London

Pressure is already mounting as owners rent out their homes while holding out for a better price, creating a glut that has begun to depress rents across London, according to a survey of brokers by the Royal Institution of Chartered Surveyors.

``Maybe it takes four, five or six years for the market to bounce back,'' said George Franks, area director for Douglas & Gordon in Battersea. ``Are the people who say they're going to rent out their homes prepared to be a landlord for that long?''

Gregory Besterman, a broker in south west London for 27 years who runs Fulham-based Sullivan Thomas, estimates the busy rental market shows there is ``two years of pent-up demand'' from potential buyers.

``As ever, London is first to fall and first to recover,'' said Jeff Doble, managing director of Dexters, a broker specializing in Putney, Chiswick and Richmond. ``Demand for property in London's suburbs is relentless and, regardless of the financial sector's woes, by 2012 prices will have recovered lost ground.''

If the U.K. government's 500 billion-pound package, presented Oct. 8, fails to revive mortgage-lending in time, Oliver Fisk and his partner may find themselves back where they were a year ago.

``It got to the point we thought we had to get on the ladder and buy a pokey flat for a ridiculous multiple so we can start thinking about starting a family,'' he said.

To contact the reporters on this story: Svenja O'Donnell in London at sodonnell@bloomberg.net; Simon Packard in London at packard@bloomberg.net.