The recent report from investment bank UBS on real estate bubbles boldly declares that London is now officially in a housing bubble.
London is currently the highest-risk city in the world for a housing price correction. Hong Kong comes in second, and is also deemed to be in a bubble, and then a further 10 cities globally are deemed to be “overvalued”, although not quite in a bubble yet.
The report cites a number of factors why many global cities are in danger of a housing price correction. First and foremost, quantitative easing has lowered interest rates and, in turn, artificially inflated asset prices. Housing has been a significant benefactor of this loose monetary policy.
For London specifically, a number of -further factors are behind the current housing bubble:
- investors, particularly foreign investors, responding to geopolitical risk, who see London real estate as a safe haven
- high property valuations in many Asian cities, which is encouraging those buyers to invest in London instead
- the government’s Help to Buy scheme
- “alluring” yields on buy-to-let
- population growth.
The report makes compelling reading, and UBS is a credible name in the industry. So should we all heed the advice of the authors and treat the London housing market with caution?
It is interesting that the two authors fall short of outright advising investors to sell now before any crash; preferring instead to hedge their bets by simply advising -caution. The authors do, however, claim there exists a risk of a substantial price correction “should the fundamentals for real estate investment deteriorate”.
What are those fundamentals? The report lists a few, such as price-income ratio, price-rent ratio, city/country price ratio, change in construction as a proportion of GDP, and change in mortgage lending as a proportion of GDP. Unfortunately, the authors are as silent on what defines a deterioration in any of these fundamentals as they are they on when this housing price correction is due – is it today, next month, next year, or in five years’ time?
For me, and for a number of industry analysts I have spoken with, this report is flawed for a number of reasons. The methodology has been criticised heavily by industry experts – for instance, using data on the incomes of London workers will never truly reflect the wages of Londoners, given how many people there are who work in London but who are actually commuters, as opposed to London residents.
In addition, the mortgage data used is nationwide, while London is heavily skewed towards equity investment (75% of house purchases in prime central London today are by cash buyers, according to one research consultancy I spoke with).
As for the government’s Help to Buy fuelling a London bubble, the statistics show that London is the least popular region in the UK for the use of this scheme – only 5% of all completed Help to Buy applications have been for London properties.
However, for me, the biggest flaw in the report is that its methodology does not track the fact that London is truly an international city, in every sense of the word.
The authors even recognise that a key factor driving London prices is international capital flows. And this has been true for more than a generation now, if not longer. While the nationality of buyers in London may change, what does not change is that international investors like to buy London real estate.
Yet the report’s methodology makes no allowance for this – and given that overseas purchasers typically account for two-thirds of the total annual sales of houses in London, this report is essentially ignoring the vast majority of demand for London housing.
Is London in a housing bubble? No-one knows, but this report does nothing to -convince me that it is.
Randeesh Sandhu is chief executive of Urban Exposure
