Even super-prime London property can’t defy market forces

“I don’t think you’ve thought this through,” Natasha says over the phone to a client.

Natasha is a colleague who just naturally commands conversations, using an economy of words to maximum effect. Her clients own a handsome house in Kensington. They bought it for £9 million (S$15 million) in the spring of 2008, above the asking price of £8.5 million. Apparently, there was competition.

The property was newly done, with all the bells and whistles, and the market seemed to be on an inexorable rise. Then in September came the collapse of Lehman Brothers, and suddenly the world was a different place.

It’s true that super-prime property in London proved resilient and bounced back faster than expected. But Natasha’s clients bought at the peak, and unfortunately for them, overpaid.

The expectation is that the super-prime market only goes one way. It’s an interesting blind spot, given almost everyone understands the vagaries of the stock market. But buyers and sellers in this segment of property seem to have trouble grasping reality.

We’ve been discussing this in the office. The broad conclusion of course is that, historically speaking, house prices rise (as have stocks). This gives people a deceptive sense of inevitability, having lost sight of the snakes and ladders nature of the market over shorter time horizons.

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The other factor is that owners frequently have a misguided idea of the value of their homes. You can’t track property prices in the way that you can shares, with a minute-by-minute valuation. Not with the same degree of precision or certainty, in any event. With that in mind:

A cautionary property tale in three paragraphs

I’ve had friends say: “My house must be worth at least £5 million because the one down the road sold for £4 million and ours has original features and a better garden.”

What I usually reply: “I’m sure you’re right!” (That is, if it’s a friend and I know this person has no actual intention of selling.)

What I want to say: “The one down the street has a south-facing garden rather than your north-facing one, it looks over greenery whereas you are overlooked by a block of flats. It has off-street parking, you don’t. It’s been done up to within an inch of its over-decorated brick-work, whereas yours resembles a time capsule from the 1960s. So of course yours is worth one million more...”

But Natasha’s clients are serious about making a move – and they cannot understand why the lift in value from the £9 million they bought it for hasn’t been greater. Fortunately, we’ve come to the party after several other agents have already given it a go at a price in the mid-teens, predictably failing to get anywhere near a bona fide offer.

The fact is, we felt that if we could get to eight figures, the client would be lucky. And Natasha has managed to hit those magic numbers… just. It’s a pretty paltry return of 12 per cent or so over almost 15 years, but when the market speaks, what can you do but listen?

Once Natasha puts down the phone, she looks over to me.

The silence speaks volumes. BLOOMBERG

The Secret Agent has run his own estate agency in central London for fifteen years. He and his team of four work in sales and acquisition in the super prime price range.