Monday, 24 April 2017

"Central London housebuilding collapses 75% as prices continue to fall"

From Property Investor Today:

The number of new homes breaking ground in central London has plunged by 75% year-on-year as house builders put planned projects on hold, and in some cases, scrap them altogether, in light of falling prices in the capital.

According to fresh data from JLL, just 1,270 residential properties were started in zones one and two in the final quarter of 2016, the lowest total for five years, as the “particularly low” figures seen in central London during the first three quarters of the year continued.

Stamp duty, in particular, continues to have a detrimental effect on the housing market in central London where properties command a price premium, resulting in a 10% levy up to £1.5m and 12% above that figure, which largely explains why fewer property transactions and lower prices are being achieved.

The number of homes changing hands in central London has been plummeting, illustrated by the 24% drop recorded in Q4 to just 1,880 transactions, while prices for newly built homes have fallen by 5.7% year-on-year, JLL found.

As Dinero commented to my post of Saturday: You don't need collusion and meetings for effects that are similar to that from a cartel. Just a restricted number of similar minded people with the same goal and information.

The end effect is indeed the same. When new homes are built and sold, it depresses prices in the very short term. Developers have found out by trial and error that this effect can be minimised if only one new home is sold for every nine existing homes bought and sold 'second hand', which is why they cap their output at this level. So if buyer interest falls, prices and volumes fall, and developers put projects on hold, maintaining the one-to-one ratio.

A explicit cartel is required to restrict supply and maintain prices if supply restrictions mean current revenue is lost which cannot be clawed back in future years. If hairdressers collude to restrict supply and push up prices, then people will let their hair grow longer between visits or learn to cut it themselves. Overall, hairdressers will lose revenue. Whether their profits are increased by this tactic depends on whether the reduction in marginal costs is more or less than the fall in revenue.

But the large developers are just land bankers, so they don't need to worry about whether they realise the profit from a site this year, next year or some years into the future. They can only sell each site once, there is no loss of revenue and as the land element is pure profit, there is no loss of profit. This also explains why the cartels for oil and diamonds have been relatively effective - you can only extract and sell oil or diamonds once.


Lola said...

Mind you if the developers were to be taxed on land values they 'bank'...

Mark Wadsworth said...

L, for sure, the post is for the benefit of Ralph M, who denies that cartel like behaviour exists and says it is not in land bankers interests to do so anyway.