Comment: London's 'bubble' is not about to burst
London Central Portfolio’s chief executive Naomi Heaton rejects fears London’s prime market is in jeopardy
‘Central London property: a bubble about to burst’ seems to be the headline of the moment. That infers prices have rapidly inflated and are about to collapse. But actually, what does a bubble really mean? Either the underlying growth trends are atypical and therefore unsustainable or the current market value is unsustainable.
We’ve repeatedly argued this is not the case and that these headline comments are derived from firstly, a short termist snapshot view of the market and secondly, a lack of understanding that prime London Central (PLC), just six square miles of the most globally desirable real estate, is uncorrelated to the UK housing market. The factors affecting the UK housing market - mortgage availability, employment and economic confidence - simply do not apply to central London, which is no longer a nation capital but a world capital.
The factors affecting the UK housing market simply do not apply to central London
Over the last 40 years average property price growth in the UK has been 9 per cent per annum. Looking at HM Land Registry statistics, available since 1996, prices in PLC, defined as the City of Westminster (CoW) and the Royal Borough of Kensington & Chelsea (RBKC) have increased from £221,679* to over £1.3 million in Q2 2012. Commentators may be staggered by this six-fold growth but believe it or not, this is almost spot on the 9 per cent trend line!
It is therefore difficult to agree that growth in central London has been atypical over the last few years and is cruising for a bruising. Of course, taking the short-term view, prices have increased from the depth of the credit crunch by 16.3 per cent per annum. However, for those taking a long term view, this upward correction to hit the long term trend line could be - and was - anticipated. Back in 2009, during the gloom of the recession, we said that prices would reach £1.25 million by the time Olympics came to London, if the market got back to long term trends. There were many doubters at the time. So while central London is not immune to global economic events, it has a habit of reverting back to the ‘norm’.
The error is to assume that central London is governed by the same affordability criteria as the rest of the country
The other aspect of a bubble is that property prices become so high they are unsustainable and therefore have to fall. It is true that on average, prices in RBKC are 24 times higher than salaries in the borough, while in the City of Westminster they are 16 times higher. This compares to a ratio of 6.5 in the rest of the country. However, does that mean they are unaffordable? The answer is probably no. Again, the error is to assume that central London is governed by the same criteria of affordability as the rest of the country. This is not the case.
London Central is a financial centre, an educational hotspot, an international playground, a ‘go to’ destination and for some, simply an investment of passion, like art or fine wine. Prime London Central is arguably the greatest capital city in the world with probably the lowest availability of property to buy, due to the conservation of its architectural heritage and almost zero land development potential. In fact, only 5,366 properties changed hands last year (just 100 a week). Set this against an increasingly wealthy global population where in 2010, 10.9 million people in the world had over $1 million of assets or more to invest. That makes a potential 2,000 investors for every PLC property. Prices are fuelled by growth in demand, combined with diminishing availability and PLC has both.
It is no surprise that this demand is fuelled by foreigners, who represent at least 60 per cent of all buyers. This of course, begs the question of whether they have priced London out of the reach of most ‘ordinary’ people and whether London should be ‘given back’ to Londoners. To do this, on the basis of an average salary of £39,000 in Kensington & Chelsea, prices in prime London Central would have to drop to just £253,000, a price not seen since the end of the recession in the late 1980s.
The economic fallout from this, in terms of jobs that depend on a healthy and growing property sector would not bear thinking about. The investment market in London Central supports a huge array of different professions, from the ‘persona non grata’ such as estate agents, bankers, mortgage brokers, to the mildly acceptable such as lawyers, accountants, architects, designers to the acceptable face of all the trades.
It is estimated that the rental investment sector alone, which represents 50 per cent of all private housing stock in prime London Central, generates £1.5 billion to the economy and a further £0.5 billion in taxes. Unfortunately, the truth is that if the Brits populated all of PLC there would be less money spent on property, the night time economy, the leisure economy and the retail trade. And where would all the corporate tenants go? Probably to Geneva, Paris or Bonn.
The laudable Government proposals designed to ensure that all homeowners pay their fair share of stamp duty land tax will undoubtedly dent the foreign investment market as an unintended consequence of measures introduced too quickly and too thoughtlessly. This could have a far greater impact than any so-called property bubble, in terms of shaping future buying behaviour but hopefully the over-riding desire to hold property in prime central London will prevail.
Surely as a nation we should be proud of the fact that London is the capital of the world and not just the UK; that we have a world-class asset which underpins jobs and economic growth - an asset any other country would aspire to. Perhaps the fantastic success of the Olympics may encourage a little less London-bashing and a bit more pride.