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?”
