Does it matter if London house prices fall?

By MoneyWeek editor-in-chief Merryn Somerset Webb Feb 22, 2008

Merryn Somerset-Webb

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How vulnerable are London house prices? asked one Sunday paper this week. Very, if any of the talks with sellers I’ve had recently are anything to go by.

One friend has been trying to sell his house in Notting Hill on and off for a year or so. Several potential sales at the full asking price have fallen through for one reason or another but he has now finally exchanged with a new buyer – at 10 % below the asking price. He says his experience is being replicated all over the centre of London from Chelsea to Clapham: it has become standard to offer 15-20% below the asking price and get 10% off.

Numbers out from Rightmove yesterday pointed to a slowdown in London prices but a real fall is only a matter of time: right now, not many people are prepared to accept low-ball offers (my friend wasn’t much bothered – he’s moving to the country and just wanted out before the offers started coming in at 30% down) so they’re hanging on hoping things get better.

But does it matter if prices fall? Depends on who you ask. Estate agents and the PRs for buy-to-let clubs think it matters. But most first-time buyers don’t and the truth is that most London home owners don’t think so either. In fact a lot of them are thrilled. Why? Because right now they are trapped in their current homes by high prices.

Say you bought a three-bedroomed house in Shepherds Bush in 1999 when you were earning £55,000, for £400,000. Now you earn £85,000 and it’s worth £950,000. That sounds good but it isn’t always so. Say you also have three children (six years - it happens) and you need another bedroom. To move to another house in the same area you are going to need another £200,000 plus £40-60,000 in moving costs upfront. You haven’t got it and your income hasn’t gone up enough to borrow it.

So that’s that. There you are stuck in the same house indefinitely. So why would you care if prices came down? You might be worth a little less on paper but you might also be able to start dreaming about moving house.

First published in The Evening Standard 19/2/08

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Published in Stock markets | More articles by Merryn Somerset Webb

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