Local buyers priced out of London housing market

Consumer demand

SHARE THIS STORY

UK housing Feb14Most people, if they are lucky, never get to see a property bubble during their lives.  But those of us alive today have seen two distinct types of bubble in action:

  • The first has been the Ponzi-type bubble sponsored by government lending policies, as seen in the subprime era and now in China.  These take house prices well beyond the levels that buyers can repay out of income.  Instead, the illusion develops that prices can never fall, and so buyers rush to take advantage of this ‘new paradigm’.  Switzerland is another quite overt example of this type of bubble in action, with banks happily lending for 50 or 100 years – well beyond the borrower’s lifetime.
  • Then there is the bubble where prices in the capital city go out of reach of the locals.  Only foreigners, and those who work with the foreigners, can now afford to buy.  This is very rare – last being seen in Japan and Thailand in 1991.  But as the chart shows, it is happening today in London.  Ratios of prices to salaries for first time buyers, for example, have moved to all-time record levels (red line), whilst ratios for the rest of the country have never recovered from the ending of the first bubble in 2008 (blue).
  • Equally, as the Financial Times has reported, “whole sections of London have become completely unaffordable” for even solidly professional middle class families, whilst ” 34% of resale transactions in prime locations now involve international buyers, who also account for almost three out of four sales of new-build homes in prime central London.”

Leading investor Mark Faber described this phenomenon in a Barron’s article in July 1992, which the blog kept for historical interest as it had seen the problem develop in Bangkok and Tokyo whilst working in Asia at the time.  Faber suggested it was the 4th stage of a 6-stage investment lifecycle, and was a rebound after the initial market collapse:

“The rebound in this Phase is very tricky.  The economy is still doing well, and the rally is usually powerful enough to induce even the sceptics back into the market.  If the fall from the previous market high has been very severe, many investors will be convinced that the market has already reached its ultimate low and is now recovering.

“I believe that time and psychology are important factors in determining whether this is true.  A quick recovery within 6 to 18 months after the high (as is the case in London today) is a sign that the excesses have not been fully wrung out of the system.  In terms of psychology, there is also a noticeable difference.

“People remain optimistic and confident about the economic prospects.  Whereas at a true bottom, pessimism is rampant as a result of total wealth destruction.

“Usually the transition into the final collapse is very subtle.  Usually there is no panic selling, but prices begin to drift lower and remain in a low-volume downtrend for an extended period, before credit deflation takes hold.

“Phase 5, which follows this, feels like a hangover after the previous financial orgy.  Because the boom has been built on a major error of judgement and usually a lot of credit, on the day of reckoning speculators suddenly realise their past miscalculations and, because their dreams of huge profits fails to materialise, harsh reality sets it.”

However, though the end result may be the same, London’s current speculation has a different cause from Tokyo’s or Bangkok’s in the late 1980s.

Today’s foreign buyers in London (and New York, and other ‘global cities’) come from Asia, the Middle East and Eastern Europe.  Many are not trying to profit from a new ‘hot’ destination.  Instead,  they fear social unrest and possible financial uncertainty at home.

Thus they are not investing for profit, but to avoid loss.  As one foreign buyer told the blog – “I know I will probably lose money on my London apartment, having paid $10m for it  But even if I lose 90% of the money, I will still have successfully moved $1m into Europe to support my family for the future.”

PREVIOUS POST

UK tinkers with higher pension ages, ignores impact on GDP

05/03/2014

Most people, if they are lucky, never get to see a property bubble during their ...

Learn more
NEXT POST

US automakers increase incentives as sales fail to boom

07/03/2014

Most people, if they are lucky, never get to see a property bubble during their ...

Learn more
More posts
Smartphone market decline begins to impact global stock markets
19/05/2019

The bad news continues for the world’s smartphone manufacturers and their suppliers.  And Pre...

Read
There’s a great future for the European plastics industry in recycled plastic
05/05/2019

Europe’s plastics industry is under major threat from the growing legislative and consumer bac...

Read
$60bn opportunity opens up for plastics industry as need to eliminate single-use packaging grows
17/03/2019

150 businesses representing over 20% of the global plastic packaging market have now agreed to start...

Read
IKEA heads into the circular world with furniture subscription trial
10/02/2019

“Once upon a time, Granny and Grandad used to go to a large shop on the motorway to buy their ...

Read
Fed’s magic money tree hopes to overcome smartphone sales downturn and global recession risk
03/02/2019

Last November, I wrote one of my “most-read posts”, titled Global smartphone recession ...

Read
Global smartphone recession confirms consumer downturn
11/11/2018

Q3 smartphone sales data show the global market in recession, as Strategy Analytics confirmed: “Th...

Read
Trump’s auto trade war adds to US demographic and debt headwinds
06/08/2018

President Trump’s auto trade tariffs are bad news for the US and global auto industry, as the ...

Read
Plastics recycling paradigm shift will create Winners and Losers
17/06/2018

My new analysis for iCIS Chemical Business highlights the paradigm shift now underway in the plasti...

Read

Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more

Analytics

Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more