For the past half-year investors have been worrying about a correction in London house prices - and to some extent in UK housing more generally. That much is clear from the share price of Foxton's, the estate agent Londoners love to hate, down 42 per cent over six months.
This month's poll of chartered surveyors published by trade body RICS provided the bears with ample ammunition. Buyer demand in the capital contracted for the fifth consecutive month in September, it found, while supply remained tight. On balance London surveyors expect house prices to fall over the next three months. It's "more of a buyers' market" concluded Peter Rollings, head of London agent Marsh & Parsons, which LSL Property Services (LSL) bought in 2011.
RICS chief economist Simon Rubinsohn cites four reasons why the UK market is cooling, led by the capital: the Bank of England "becoming more vocal about the risks", affordability, new mortgage rules and expectations of higher interest rates. In London, politics could be added to this list. Shadow chancellor Ed Balls has just unveiled tentative details of his 'mansion tax' plan. If Labour wins next year's general election, owners of properties valued at £2m-£3m (most of which are in London) will pay an extra £3,000 a year to the government.
Investors can easily sidestep the politics by investing in companies that operate below the £2m mark. Revealingly, the only clearly upbeat comment about London in the RICS report came from a surveyor operating in Tower Hamlets, Hackney, City and Newham - for the most part cheaper areas. "Seeing good demand across most of my patch, underpinned by regeneration," he noted, echoing Telford's comments. At the other end of the spectrum, prime housebuilder Berkeley Group (BKG) looks exposed.
The new mortgage rules in question are mainly those associated with the Mortgage Market Review, which came into effect in April and forces lenders to test the affordability of homes against the assumption that interest rates will rise. No doubt that's one reason why mortgage approvals in August were 15 per cent below their January peak (seasonally adjusted). But the dip is surely a hiatus rather than the start of a protracted downturn. Lending is still about 50 per cent below pre-crisis levels. As banks get used to the new rules and start competing for market share, approvals should bounce back.
More recently, the Bank of England also set a limit on the share of banks' new loans with a loan-to-income multiple above 4.5 times. Set above current levels, that limit cannot be directly responsible for the slowdown. But given the publicity surrounding any Bank action to cool the housing market, it probably succeeded in putting off some buyers.
Affordability and the prospect of rising interest rates are related. In London, house prices equate to about 11 times average earnings, so housing is only affordable to the wealthy, and then only thanks to cheap mortgages. The most modest interest-rate increases will choke off demand, as is currently happening. Elsewhere homes are much more affordable, but cheap mortgages still support the market.
However, I can't help feeling the fears about rising interest rates are now overdone. The latest market correction has demonstrated yet again that the Bank will only tighten monetary policy as far as the strength of the recovery justifies it. If the housing market stalls, the doves will start cooing. With inflation at five-year lows, they can afford to. And if the Bank is happy to hold interest rates low, it is hard to see plausible catalysts for a correction.
It may, therefore, be time to buy back cheap housing plays - particularly those with big operations outside London. Estate agents Countrywide and LSL, both well diversified geographically and operationally, have lost about a quarter of their market value over the past half year. On 12 and 10 times this year's earnings, respectively, their shares now look cheap. And Grainger, the largest listed landlord, has seen its stock fall to just 80 per cent of the most conservative measure of its net worth last March (so-called triple NAV). When markets flip-flop from optimism to pessimism and back, focus on value.