London property bubble examined


I recently happened across an article in The Week which seemed to grasp at straws.
Here’s another good sign that sanctions against Russia are working

It went on to explain that a Russian oligarch had just purchased an unfinished 16,000 square foot apartment in London for $236.4 million

The main issue in London is migration, and fundamentally that is made up of economic refugees. People fleeing from the economic messes of their own countries. I think you can split this group down into two.

First, the people fleeing for work. Primarily from the Eurozone. They tend to be the productive, and the effect on the counties they are leaving isn’t good either. They lose the tax payers that pay in more than they take out because they are young. That causes more instability and economic woes.

Second are the rich looking for a safe haven. From Greece to Russia, people know what states do when desperate. They just take people’s money. See Cyprus for the taking from bank accounts without permission. See the IMF plans for a 15% raid on bank accounts, just to stop the Eurozone from getting worse. [In the UK there are plans for the tax man to do the same, heck they even take your organs now without permission]. So the rich buy an expensive property in the UK. If it all goes Pete Tong (wrong), then they can get on a plane or boat, arrive in London, and have a good life. It is insurance against the inevitable.

Didn’t we discussed this same topic months ago?

Of course there is a bubble, the question is how to deactivate it before it explodes blowing away all regular Londoners and their savings.


New York and San Francisco are widely considered to be relatively immune from the traditional relationship between incomes, rents, and purchase price. There are enough people with cash who don’t need an income to afford expensive properties, and over time there isn’t anything that will stop them from concentrating potentially all the world’s wealth in a few cities. People who rent are in fact getting a much better deal than buyers, because rents are more coupled to income than buy price.

One of the figures that is often quoted about the ridiculous inflation seen during the Japanese housing bubble is that, just before the collapse, if you were to fold a $100 bill in half and then in half again and lay it on the floor, the value of the land it covered would exceed the value of the note. London property prices (albeit in very high end developments) are now in excess of £10,000 per square foot, and the top end of the market (mostly dominated by the foreign investors mentioned in the article) is having a distorting effect on the rest of the market. People are now paying above list price for properties in the suburbs and buying sight unseen, and in my opinion this is classic bubble investment behaviour; people see the potential for profit in an inflationary market and are falling over themselves to get a slice, which drives inflation further.

The problem with this market is that it is utterly unsustainable in its current form; thanks to the recession, wages have remained stagnant (and have decreased in real terms) for the last five years, and demand is far outstripping supply.

The problem with London specifically is that, where other cities such as Tokyo have been able to physically expand to meet demand for commuter housing (it is not uncommon to commute from neighbouring prefectures into Tokyo), London is a 21st century city with 17th century infrastructure and this makes any further expansion extremely difficult; commuter trains are slow and poorly run and commuting across the city if one is outside of the underground network is impractical to the point of being impossible.

A shortage of practical commuter housing and comparatively low wages means that many (myself included) have already been priced out of the capital and will look elsewhere for work. If housing prices continue to grow at their current rate with no new development, the cost of housing workers will be a major deterrent to business and we will see a shift in investment into other cities in the UK, until demand no longer oustrips supply and homeowners are left with grossly overvalued housing with noone wanting to buy.

The helpful question, then, is not “will the housing market collapse?” but “when will it collapse and for how long will homeowners be left in negative equity while they wait for the cycle to begin again and demand to recover?”

If everybody’s discussing the bubble, it’s not a bubble. It’s when people begin to say it can “never go down”… that’s when you start hiding gold in the cellar.

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There was an article just a few days ago about how England - and specifically London - had the greatest per-capita number of billionaires in the world. I suspect that influx of deep pockets is the proximate cause. As to whether its a ‘bubble’ or not, well that depends on exactly why they’re registering property in London (one assumes tax reasons) and whether or not that reason will change any time soon. If Inland Revenue doesn’t make it unpleasant for the big money boys, London City proper could just become another gated community for them…

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Even when “This can’t go on forever” is an easy call to make, “How long can this go on?” is still a very difficult question to answer. It is often the case that many of the people participating in a bubble actually realize it. They just think that they are smart enough to get out before the crash.

I just wish folks would just stop. getting. bloody. loans.

Going into hock up to the eyeballs not only puts your balls in a vise, it fuels the fucking banksters’ license to print money.

Maybe if more folks knew how this all worked, a few might be a little more reluctant to play the game.

Is this only true for a select subset of properties (that is, people renting are living in buildings whose price to buy is reflected properly in the rent)? Or could a large proportion of landlords make a killing by selling and then investing in something (or somewhere) else?

There was plenty of talk about the bubble before the US housing crash. Heck, Alan Greenspan was talking about it, but because there was money to be made speculators kept at it. Most people knew it was a bubble and that a crash was coming, but maybe they would be the smart one that could get out before it all came tumbling down.


What’s the alternative? Saving up for 30 years to buy your home with cash, paying rent the entire time and having to chase the housing market? Not too many people have $200k just sitting around. As much as I don’t like bankers, landlords aren’t much better.

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There’s more to it.

As investor cash pours into London, it pursues desirable areas near the centre - because that’s all they can know. The owners living there see leaflets coming through the door offering much more money than they ever believed, so they look to the burbs and find leafy nice areas, then sell up and move.

So there’s a wave of concentric circles expanding outwards, and they funnel into desirable areas, which typically have a cluster of well-to-dos already - some kind of connection.

And we’re seeing nasty, nasty tactics. A fair number of people in, say, Chelsea (posh), have assets (house), but no cash. So developers are setting up specialist units to lend to them, content in the knowledge that to repay the immense loan and interest, these people will eventually sell their house, with right of first refusal to the lender. Presto - you get hold of an entire row of thirty houses.

I’ve seen that in action. Nasty.

But the bubble - the people currently being displaced from the centre will not return, as the availability of property will not increase - wealthy people can afford to buy a house, and leave it empty. They don’t care. They don’t put it on the market. It just sadly sits.

Check out Lancaster Gate in London - lovely area, but emptier than my wallet.

I remember reading about this before. Might have been linked to from here…

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I think it’s important to point this out.

Even Bernanke, when he got into that seat, said that housing was overvalued, just not that over valued. He was wrong, of course, but everyone was talking about the bubble.

Talk is cheap.

Yes, both are true, at least in San Francisco where I live:

Properties which are zoned for rental rather than purchase (by rent control laws which make it hard to turn rentals into condos) are more immune from the cash-buyer effect.

And I believe that a large proportion of condo owners could make more money by selling and investing in the stock market instead. I did just that, selling my SF area condo and investing instead in the stock market while renting, and the capital that I would have tied up in real estate performed much better in the stock market even though the real estate market has been going gangbusters here.

However the very rich people who have lots of cash here have reasons other than return that motivate them to stay invested in real estate over other better performing options, so this inefficiency will likely persist.

I’m starting to wonder if ‘regular Londoners’ still exist. It seems to increasingly be a city where you live intensely for a few years in order to pursue some personal project (education, career etc) then get out as soon as you run out of steam.

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We need to create one.

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Ooh wow.

And we’ve kind of come a long way when it comes to ‘being able to explain how the pieces weave together’.

I think it might be time for me to revisit things here! Thanks for the reminder Kimmo!

And yeah, this whole birth-nation-lottery thing is due some asymmetric competition, it’s time to give people their entire lives back, isn’t it?

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