Trying to understand an article about London real estate
February 5, 2010 7:22 AM   Subscribe

Question about London real estate. I'm an American reading an article about London real estate in an American newspaper and don't understand parts of it. More detail inside.

So I read this article in the Wall St. Journal last night about London's pricey real estate.

Two questions:

(1) The second paragraph of the linked article reads "Yours for a mere $1.5 million. It seems quite a high price, especially for a property whose ground lease will eventually expire, leaving you with nothing." What does it mean to have a "ground lease [which] will eventually expire"?

(2) Is mortgage interest in the UK tax-deductible?

(No, I'm not looking to buy property in London. I'm just trying to read between the lines of this article because I am interested in Manhattan's real estate market in the US; people who want to buy in Manhattan are somewhat similar, financially speaking, to people who want to buy in London. I'm trying to understand what props up prices in London.)

Thanks.
posted by dfriedman to Work & Money (11 answers total) 1 user marked this as a favorite
 
Best answer: 1) it means exactly what it sounds like - you don't have title to the land. A third party does. Generally as long as there are several decades left on the ground lease the banks are cool with it. There are a few co-ops in NYC with this arrangement BTW.

2)No

The mortgage market in the UK offers many many more products that make the market even more sensitive to interest rates.

London RE is much much crazier than NYC for a bunch or reasons - none of which really make sense in the long-term. The average brit has more leverage than the average american.
posted by JPD at 7:27 AM on February 5, 2010


From what I remember from Stephenson's Baroque Cycle books, you can't really "buy" real estate in London, as everything operates on perpetually-renewing 99 year leases.
posted by Oktober at 7:27 AM on February 5, 2010


Best answer: The ground lease will expire but you can normally extend it for a fairly nominal sum or purchase the freehold - "freehold enfranchisement".

Mortgage interest isn't tax deductible in the UK anymore - this was called MIRAS but is now abolished.

I'm a Londoner weighting up pros and cons of buying - thanks for the article. I get the impression that NY real estate has held up ok?
posted by laukf at 7:29 AM on February 5, 2010 [1 favorite]


Best answer: In the UK one can get a property on a leasehold. As the link describes its kind of like a very long tenancy, typically 99 or 999 years, with the property reverting back to the freeholder at the end of the period. The lease can be bought and sold during the period of the lease, though for obvious reasons it tends to decline in value as the end of the lease period is approached.
posted by biffa at 7:30 AM on February 5, 2010 [2 favorites]


Best answer: I get the impression that NY real estate has held up ok?


not really. sort of a slowly unfolding disaster. NY just lagged the rest of the US. While we aren't AS exposed to the financial services industry as SE England is, it is still a huge component of local wages. Also the us government has been propping up the market for new mortgages - if/when that expires we'll see what happens. Ratios are still out of whack relative to history - even adjusting for low rates.
posted by JPD at 7:32 AM on February 5, 2010 [1 favorite]


Response by poster: JPD is correct.

Also worth mentioning is that the liquidity injected into the US economy by Drs. Greenspan and Bernanke have altered the short-term portion of the yield curve, and so capital has been artificially cheap for the past 20 years or so...which means that, once the economy picks up steam, interest rates in the US will skyrocket (inflation) and the value of real estate will decline, significantly, because higher capital costs will drive down the asking price.

Etc.
posted by dfriedman at 7:35 AM on February 5, 2010 [1 favorite]


wait, but in the UK if you buy a home as an 'investment property' then isn't the Interest Deductible against the Rent you recieve from your tenants?

You just can't claim tax deductions against your residental home mortgage costs (and it seems absurd that in the USA you can... so Renters are doubly screwed).
posted by mary8nne at 7:57 AM on February 5, 2010


Response by poster: It is absurd that in the US you can claim deductions on your mortgage interest. That is one of the government interventions that has artificially propped up real estate prices in the US. This was made into law shortly after WWII under the rubric of the so-called "GI Bill."

Suburbs such as Levittown were the inevitable result of this market intervention.
posted by dfriedman at 8:00 AM on February 5, 2010


You think that's bad - feudal tenure was only abolished in Scotland in 2004. Up to that point my parents were actually vassals of some big insurance conglomerate who owned the feudal rights to the land their house was built on, and had to pay them money each year (only a few quid).
posted by Coobeastie at 8:16 AM on February 5, 2010


It's worth mentioning that you generally buy the freehold to a house in the UK, but you buy the leasehold of a flat.
posted by altolinguistic at 10:06 AM on February 5, 2010 [1 favorite]


It's true you have a leasehold for a flat, but as laukf says, you can often also buy out the freehold of the block as a group of tenants, and then you typically then also own a share of the freehold - I had this arrangement in my old flat and it worked quite well.
posted by crocomancer at 3:38 PM on February 5, 2010


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