Foreign buyers of new build homes are a popular focus of blame for the London housing crisis*. Last year, the Mayor of London launched an inquiry into the issue. This should help answer some of the outstanding questions, particularly around occupancy and whether foreign buyers help get more homes built.
However, my biggest concern is the scale, cost, and currency of overseas mortgage debt secured against new build homes, particularly by Asian buyers.
A significant proportion of new build sales since the credit crunch have been to Asian buyers. A Savills report from 2013 suggests they accounted for around 45% of new build sales and were particularly active in the £700-£2,000 per sq. ft. market (see Graph 4). Unfortunately most agents have stopped reporting information on overseas buyers in recent years.
These Asian buyers are welcomed by developers as they are prepared to buy off-plan years before completion, something most mortgage dependent domestic buyers can not do. For many developers, selling a large proportion (50%+) of units off-plan is essential to unlock the finance needed to start construction. Since the recession, sales trips to major Asian cities have become the norm for any new major London residential development.
What appears to have not been questioned is where the money for these purchases was coming from. Most commentators simply pointed to the growing middle classes and wealth generated in Asia. The limited statistics available suggested the buyers were cash only as no UK mortgage was required.
However, anecdotal evidence suggests that many of these buyers have been using local mortgages to fund their purchases. The limited evidence I have suggests that around half of Hong Kong and Singaporean buyers use a local mortgage while the majority of mainland Chinese buyers use one**.
A quick check of Asian lenders (UOB, DBS, OCBC, Maybank, CIMB) suggests that the borrowing terms available are broadly similar to those for actual UK first time buyers in London. The main difference is that the mortgage rate tends to be slightly higher (London Home Loan comparison) and local lenders allow borrowers to have far higher debt multiples. For example, Singaporeans are now limited to only spending 60% of their gross income on total debt repayments.
It is the cost of servicing their debt that is my biggest concern. Average rental yields in the areas of London with high new build supply suggest that many mortgaged buyers may have just been covering their repayments from their net rent. Indeed, some of those buyers with higher loan-to-value mortgages (e.g. 75%) may have needed to supplement their rental income to cover their costs. This would suggest the buyers were focused on capital appreciation.
The depreciation of the pound since the EU referendum has added further risks. An unknown proportion of buyers have local currency mortgages (the best information I’ve got is from this interesting article). It would appear that some owners will now be covering the shortfall in their local currency repayments thanks to much lower rental income.
That raises the question of why we haven’t seen more signs of stress. The biggest unknown is the scale of the issue. I haven’t found any data on the value or volume of overseas lending in London. In theory, these mortgages should be identifiable as first charges on the Land Registry property record but unfortunately this information is not freely available.
This could possibly just be a minor issue. In the context of the whole London housing market, these new build markets are fairly small. However, the danger is that any risks are highly concentrated in both geography and price. This is particularly a risk as many of those schemes sold off-plan back in 2012-14 should now be nearing completion. After years of strong sales and starts, completions are rising (see Figure 3). Meanwhile London house prices are slowing or falling. Those off-plan buyers will now be approaching the point where they have to decide whether to put up the cash or walk away from their deposit.
Another possible explanation for why we haven’t seen more stress is that owners are being bailed out by the higher rental yields achievable on short term lets. Last year I visited a development in Nine Elms and the lobby felt more like a hotel than a residential block. There were significant numbers of people appearing to pick up and drop off keys with suitcases in tow.
*This House of Commons Briefing Paper is a useful summary of the concerns and counter-arguments.
**Mainland Chinese buyers appear to be buying with very high loan-to-values and mortgage rates, to the extent that they are almost definitely subsidising their overseas purchase. That may just be the cost of getting money out of the country.