Over and over again I’ve been asking myself: is there a housing bubble in London? Certainly house prices are booming but I was never comfortable calling a bubble in the typical sense of that word.
Why? Because this didn’t look like a standard asset price bubble. Bubbles are driven by credit. But the London market is being driven by cash flowing into the top-end of the market.
It is areas like Chelsea and Mayfair that are really driving the London property market. These houses are being bought, not as residential properties, but as financial assets.
In the current low-yield, QE environment cash is pushed into a wide variety of risky assets. That is why we see stock markets booming while the real economy crawls along at a snail’s pace. I reckon that financial advisers have long been pushing the extremely wealthy into very high-end property in various large cities.
In London a lot of the high-end property is bought up by Russian billionaires. At the start of this year The Guardian did a report on something that had long been folk knowledge in London. In the report entitled Inside ‘Billionaires Row’: London’s rotting, derelict mansions worth £350m Robert Booth wrote,
A third of the mansions on the most expensive stretch of London’s “Billionaires Row” are standing empty, including several huge houses that have fallen into ruin after standing almost completely vacant for a quarter of a century… Estate agents and property developers said the avenue was in transition, with apartments under construction that would bring life back to the area, but said high vacancy rates were inevitable in an international market such as London where buyers come from the Middle East, Russia and increasingly China.
The foreign money that was flowing in to the high-end of the London market is what has really driven up prices. The lower-end of the market, which has not increased in value at nearly the same rates, is following that trend, not leading it.
I always thought that the end to this would be when the low-yield zero interest rate environment was reversed by central banks — something that is unlikely to happen for a rather long time — but the recent threats of economic sanctions by the West against Russia raises the question: what if Russian assets in London were seized or Russian money prevented from entering the market? If this occurred could it hit high-end property prices in London to such an extent that the enthusiasm was driven out of the whole market?
It is certainly a question worth raising — even if we cannot give a definitive answer. In credit-driven property bubbles it is the bottom of the market that falls out first as low-quality loans to people who cannot afford repayments go sour. If the above scenario played out we would see quite the opposite; namely, a property market that goes rotten, like a fish, from the head down.