Don't Blame Brexit for London's Housing Chill

Switzerland shows demand is faltering in other financial hubs.

Unless you've been living in a cave this year and the Brexit vote passed you by, you'd have seen the air coming out of Britain's property bubble.

Price growth is stalling -- the lowest in three years, according to figures released Thursday -- and the number of transactions is on track to be its lowest since the financial crisis of 2008.

Property Freeze

Key U.K. property survey shows a sharp slowdown in house-price growth

Source: Bloomberg

In London, the picture's even worse. Prices are falling already.

City Slick

London is the worst regional performer, having fallen into outright negative territory

Source: RICS

For those who lay the blame squarely at the feet of Brexit (or who believe that London's status as a global financial hub will help it rebound) don't forget that real-estate booms are running out of steam in other countries, too. UBS expects Swiss house prices to fall for the first time in 17 years in 2016, largely because they've become un-affordable. The bank's Swiss real estate bubble index fell in both the first and second quarters this year. 

Those expecting London prices to stabilize must be hoping that the U.K. is more of a defensive market than Switzerland. That looks optimistic. Remember that London already looked stretched before the Brexit vote. First-time buyers have to pay more than 10 times their annual earnings for a property, according to mortgage lender Nationwide. That's the highest in more than three decades and about twice the level nationally.

Think about that for a minute: London house prices could fall by half and still only be in line with the rest of the country in terms of affordability.

How To Spend It

London property is twice as expensive relative to first-time-buyer earnings than in the rest of the country

Source: Nationwide

This isn't a bubble that can be inflated forever by mortgage lending -- at least according to Moody's, which expects Brexit to contribute to a broad slowdown in house purchases and new loans.

And it's not just residential property suffering. London offices face a chill too. On Thursday, developer Derwent cut its rental growth expectations to between 1 and 5 percent this year, down from 5 to 8 percent. It said a development in the Paddington district could be delayed if demand for office space deteriorates.

Out of Office

Shares of commercial property developer Derwent have underperformed since the U.K. EU vote

Source: Bloomberg

Yes, there's evidence suggesting the decline will be manageable, for now. Supply is constrained. The pound's fall since the Brexit vote makes U.K. property cheaper for foreigners. Crucially, borrowing costs are going down, and interest rates are at a record low.

Support for Property?

Falling gilt yields, a trend that is not slowing down, has kept supporting investment in real estate

Source: Bloomberg data

But if other financial hubs are seeing a slowdown in the real-estate boom at a time of falling and even negative rates, it becomes harder to blame Brexit -- and harder to see a way out of a correction, however manageable. Bricks and mortar just aren't what they used to be.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Lionel Laurent in London at

    To contact the editor responsible for this story:
    Edward Evans at

    Before it's here, it's on the Bloomberg Terminal.