The London Real Estate Bubble


In October, London real estate asking prices jumped 10%. In my view is kind of parabolic-looking jump has developed out of quite a silly situation, and one I think is a good exhibit of just how irrational and weird markets can sometimes be.  London real estate prices have been rising strongly for a long while, and a large quantity — over half for houses above £1 million — of the demand for London real estate is coming from overseas buyers most of whom are buying for investment purposes. It is comprehensible that London is a desirable place to live, and that demand for housing in London might be higher than elsewhere in the UK. It is a diverse and rich place culturally and socially, boasting a huge variety of shopping, parks, art galleries, creative communities, restaurants, monuments and landmarks, theatres and venues, financial service providers, lawyers, think tanks, technology startups, universities, scientific institutions, sports clubs and infrastructure. Britain’s legal framework and its straightforward tax structure for wealthy foreign residents has proven highly attractive to the global super rich. With London real estate proving perennially popular, and with the global low-interest rate environment that has made borrowing for speculation cheap and easy, it is highly unsurprising that prices and rents have pushed upward and upward as the global super rich — alongside pension funds and hedge funds — sitting on large piles of cash have sought to achieve higher yields than cash or bonds by speculating in real estate. In some senses, London real estate (and real estate in other globally-desirable cities) has become a new reserve currency. And while this has occurred, price rises have proven increasingly cyclical as both London residents and speculators have sought to buy. The higher prices go, the more London residents become desperate to get their feet on the property ladder in fear they won’t ever be able to do so, and the more speculators are drawn in, seeing London real estate as an asset that just keeps going up and up.

Yet the bigger the bubble, the bigger the bust. And I think what we are seeing in London is a large psychological bubble, a mass delusion built on other delusions. Chief among these delusions is that real estate should be seen as a productive investment, as an implicit pension fund, or as a guaranteed source of real yield. While investors can look at real estate however they like, there is no getting away from the fact that real estate is a deteriorating asset. Sitting on a deteriorating asset and hoping for a real price gain — or even to preserve your purchasing power — is a speculation, not a productive investment. For commercial enterprises buying as a premises for business, or for residents buying as a place to live this is not in itself problematic. But as an investment this can be hugely problematic. It is just gambling on a deteriorating asset under the guise of buying a “safe” asset.

Of course, in the UK where housing has been treated by many successive governments as an investment, and as a haven for savings and pensions, real estate owners have done particularly well. Governments have been willing to prop up the market with liquidity via schemes like Help To Buy and via restrictive planning laws to rig the market to restrict supply. This may make investors feel particularly secure, but governments can be forced — not least by demographics — to swing in another direction. An important side-effect of continually rising prices and a restricted supply of housing is that many people will not be able to afford to buy a home. With the house prices-to-wages ratio sitting far above the long-term average, the next UK government will come under severe pressure within the next few years to allow — and probably subsidise — much more housebuilding to bring down housing costs for the population. The past-trend of government-protected gains may have inspired a false sense of security in investors.

But such a reversal of policy would not in itself crash the London real estate market. After all, London is a unique place in Britain, and the majority of the new housebuilding may take place away from London. More likely, the bubble will simply collapse under the weight of its own growth. Sooner or later, even with liquidity cheap and plentiful, the number of speculators seeking to cash out will exceed the number of speculators seeking to cash in, and confidence will dip. Sometimes, this simply equates to a small correction in the context of a large upward trend, but sometimes — especially when it can be negatively rationalised — it manifests into a deeper malaise.

When this occurs, one probable rationalisation is as follows.  Domestically, many of the relatively low-income artists, designers, technologists, musicians, students, artisans, academics, service workers and professionals (etc) who make London London are priced out, then they will go and contribute to communities elsewhere where rents and housing costs are lower — Birmingham, Manchester, Glasgow, Paris, Berlin, out into the sprawl of the home counties, and deeper into the English countryside, to places where a four bedroom house costs the same as a studio apartment in central London. Where once this would have been culturally, professionally and socially prohibitive, fast, ubiquitous internet allows for people to live a culturally and socially connected life without necessarily living in a big city like London. Internationally, other cheaper cities and jurisdictions will simply catch up with London in terms of amenities and desirability to the global super class. Competition for global capital  is huge, and while London as an Old World metropolis has done well since 2008, it may suffer in the wake of renewed competition from newer, cheaper, faster-growing Eastern metropolises.

When the bubble begins to burst — something that I think could occur endogenously within the next five years, especially if the fast increases continue — speculators, and especially speculators who are heavily leveraged may face severe problems, resulting in a worsened liquidation and contraction, and possibly threatening the liquidity of heavily-invested lenders. As many people at the table are sitting on big gains, they may prove desperate to cash out. Just as many presently feel pressured to get in to avoid being priced out of London forever, a downward turn could be severely worsened as many who are heavily invested in the bubble and scared of losing gains on which they hoped to fund retirements (etc) feel pressured to get out. Such an accelerated liquidation could easily lead to another recession. While I doubt that London prices will fall below the UK average, prices may see a very sharp correction. The psychological bubble is composed of multiple fallacies — that housing is a safe place to put savings and not a speculation, that deteriorating real estate should yield higher returns than productive business investments, that the UK government will continue to protect real estate speculators, that large flows of capital from overseas speculators will continue into London. A bursting of any of these fallacies could begin to bring the whole thing into question, even in the context of continued provision of liquidity from the Bank of England.

57 thoughts on “The London Real Estate Bubble

  1. UK mortgages are also usually short term fixed rate or long term variable, unlike the long term fixed loans that make up the majority of US mortgages. A rise in rates would create a dual incentive for investors being offered higher yields in bonds while facing higher mortgage payments.

    • Sure, that would be an incentive if interest rates were to rise. Personally, I’m not really convinced that rates will rise at all. I think the bubble could burst without rates rising significantly.

    • Consumer price inflation has been relatively contained in Britain too, although we did experienced a more severe energy shock around 2011. I don’t see the London property bubble as evidence of inflation. I see it as evidence of the market acting irrationally. Inflation entails a general increase in price levels. This entails rentiers trying to make a quick buck. I do think the current depressed economy is spurring the hunt for yield. This is the same trend, really that spurred the 2011 bubble in gold — people trying to make money without investing in productive projects in the context of a depressed economy.

      • “I don’t see the London property bubble as evidence of inflation. I see it as evidence of the market acting irrationally. ”

        Why irrationally? You interpret London real estate boom as a hunt for yield by exuberant crowd. But it may also be interpreted as pure rational spending. Low interest rates policy in major economies encourages debt-driven business model and pushes stock markets up. Hence the feeling of prosperity and the need to offload a few mil on a London apartment amongst “successful business people” from oversees. Cheap money that Fed et al are pumping into economy pops up in most unusual places around the world, and you see Russians and Chinese spending the spillovers in your city.

        • Low interest rates is not a policy so much as a symptom of a depressed economy. Interest rates are simply the cost of money, and when lots of capital is idle — as it has been for the last five years — the price is cheap.

          Maybe the actions are partially rational to a limited extent. That is, in principle they may certainly be an increased yield over cash and bonds, and they may appear superficially safe. Yet a deeper analysis reveals that those higher yields come at huge risk. Far more rational is to engage in productive non-speculative activities that will produce a return. Yet to many investors these seem riskier than gambling on real estate. Yes the yields are currently impressive. But the capacity for getting burned is huge.

          Ultimately, markets are just aggregates of humans, and humans can be very stupid sometimes.

        • “when lots of capital is idle — as it has been for the last five years — the price is cheap”

          That might be so, but what puzzles me is why the Fed keeps injecting 1 tril of $ per year into US economy when there is so much idling capital sitting on sidelines. And just the talk of reducing monthly injections by 20 or so bil $ sends the shock waves around the globe. That makes me think that Fed has something to do with the cheapness of money.

          Whether London real estate buyers are at financial risk is debatable. I have a feeling that this million they spend on a flat is not their last million. This is the class of people for whom “engage in productive non-speculative activities that will produce a return” is hardly an option. They are going to be fine whether prices to up 50% or down 50%, they just don’t care, it is pocket change for them.

        • That might be so, but what puzzles me is why the Fed keeps injecting 1 tril of $ per year into US economy when there is so much idling capital sitting on sidelines. And just the talk of reducing monthly injections by 20 or so bil $ sends the shock waves around the globe. That makes me think that Fed has something to do with the cheapness of money.

          The Fed is trying to push investors away from safer assets like bonds and into productive assets like stocks. It is not as if the Fed is really injecting more capital into the economy, as it is taking capital out and replacing with zero-yielding cash. Personally, I am pretty sceptical of these measures in terms of actually yielding much productive investment.

          What we see instead is yield chasing. That is not to say that investors would not be chasing yield if it was not for the Fed. The depressed economy is real, and that does lead to chasing yield. I don’t think central banks are causing the malinvestment, but neither are they discouraging it.

          Whether London real estate buyers are at financial risk is debatable. I have a feeling that this million they spend on a flat is not their last million. This is the class of people for whom “engage in productive non-speculative activities that will produce a return” is hardly an option. They are going to be fine whether prices to up 50% or down 50%, they just don’t care, it is pocket change for them.

          Sure, you’re probably right about this to some degree, but remember that a lot of HNWIs still engage in some pretty risky leveraged behaviour through corporate shells. While their personal fortunes may not be under threat from a bursting bubble, they can still cause a lot of damage to the financial sector and wider economy.

        • “Low interest rates is not a policy so much as a symptom of a depressed economy. Interest rates are simply the cost of money, and when lots of capital is idle — as it has been for the last five years — the price is cheap.”

          The above statement applies only in a market economy. The cost of money now [for the BIG players out there is essentially ZERO], because there is no risk. Worse comes to worse, you just dump it on someone else and re-load.

          People do stupid things like buy bubble real estate because they couldn’t care less [it’s not their money]. It’s the poor slobs who use their own money who get destroyed when the bubble inevitably pops.

  2. Who are the buyers can afford the current prices? Mostly the rich foreigners?

    Bubble or not it’s supply and demand. London Real Estate may not really a bubble at all. Why? Because with so limited supply and the unlimited rich people worldwide pouring into London to buy London property in cash. Why shouldn’t London jack it’s price as high as possible to sell to the foreigners who have pile of cash to burn?

    Don’t worry too much about the burst of bubble in the future. This future may be far far away. London will remain expensive as long as more and more rich foreigners can come and buy until the British people want their government to set up restriction of foreign purchases. The burst of such bubble will hurt those who bought at the highest price. In this case, they will be the rich people who bought in the highest prices in borrowed money.
    But how many British are borrowing money to buy high priced Real Estate? But even there some, they will still make money as long as there rich foreigners strapped with cash coming in to take those property off their hands. Many be these house flippers in borrowed money are the London Bankers and their friends, (who have the access to insiders information.)

    You may call it bubble but you may also called it: “You don’t want to sell your country / land etc etc., cheap to the foreigners’ demand.”

    Real Estate is alway about Location, Location, and Location. London is indeed the most exciting city in the whole world. it’s the prime location of the prime location of the world.

  3. It’s a grand wealth transfer scheme. Generally, governments brain wash their poor citizens to burden with more debts taken from the banks with bad debts.

    The house price cannot sustain its price because people wages at the bottom of the pyramid are stagnant. Moreover, the food & energy inflation has taken their spending power.

  4. This is nonsense. Most people born in london are trapped in london, they have no idea how to get out, other than moving a bit further out into the suburbs. They are a desperate captive population that will keep this cycle of exploitation going for a very very long time. Then of course you have all the other people coming from every corner of the UK and the rest of the world for some reason. The monstrous pyramid will continue to grow.

    • Most people born in london are trapped in london, they have no idea how to get out, other than moving a bit further out into the suburbs.

      You can buy a 4-bedroom house in many areas of the country for the same as a studio in central London. This is not sustainable, especially given the convergence the internet is delivering. The crash could take another 3 or 4 or more years to materialise, but like the NASDAQ before it it will happen.

      • do you know many Londoners who are thinking of moving out because they can just work via the internet? There might be a crash in the top end of the property market, but most of the market is held up by the irresistible gravitational pull of London on average people.

        • That’s why Britain must build high speed bullet train rail. The servants can live farther away from London while the rich people live in the city.

  5. I concur with 90% of this, but I think a phrase towards the end might be key: “…that the UK government will continue to protect real estate speculators.”

    I think that if any of the fallacies you mention begin to come unstuck to the extent that house prices begin to fall, the government will step in and interfere to prop things up. I’m not anti-government per se, but I don’t see anything from the three main parties to suggest they’d have the courage to do anything but try to maintain the status quo.

    (First post here, so just like to say thanks for the blog – I’m enjoying it!)

  6. What’s your take on the effects of building restrictions?

    “8. Why not build more? Well first, blame these guys.

    That’s Clement Attlee’s cabinet. In 1947, the Attlee government introduced the Town and Country Planning Act, which made it illegal to build anything without planning permission. Their plan was that the government would provide most new housing, and new private homes would be very strongly restricted. Meanwhile, big, successful cities such as London, Oxford and Birmingham would be surrounded by green belts, in which it is almost impossible to build anything. They really hated urban sprawl.”

    “So what’s the solution? Well, we can change the law.

    According to the London School of Economics, if we let London expand by one mile into the scrubby green belt within the M25, we could add 1m new homes. Doubling the density of some of zone 2’s neighbourhoods by making it easier to build upwards could have a similar effect. Both would upset people who already own homes nearby—but it would make London’s housing cheaper and more spacious for everyone else.”

  7. Why Europe’s Cyprus template of course: according to Rightmove, the “frenzy” of activity in parts of prime inner London is due to overseas investors who are looking for a safe haven to place their cash, which is “leaving the shelves bare.” This time round, the UK is seen as a safer bet, and of course the rich are going to continue to look towards this great European capital as an oasis of safety.


    Great article. “Floored” is really awesome. Those floor-plans look INCREDIBLE. How is Urban Compass different from Suitey?What home buyers really need is a good portal to see all nuts and bolts of a building, like Building Violations, like BUILDVIO

  9. Forget the theoretical and the hypothetical and speculate. Borrow as much as you can and buy as much as possible. I have made money around the world even borrowing on credit cards to buy property and shares.

    • London , Auckland in New Zealand , Toronto , Vancouver are great places to speculate. Even Sydney would be good. Only buy once it starts to go up. Forget about unknown places which have potential, renovations , or trying to be smarter than the market. Take the easy low hanging fruit and only buy if it is heating up. This is how speculators make money.

    • Stealing is a very strong word my friend. Risk management is a better term. If we live in a capitalist system we play by those rules. That is the reality. Speculators take on risk and provide liquidity to the market.

      • Discount all these bubble bursting forecasters. They have never made a cent in their lives but quick with theoretical and hypothetical rubbish. Lot of people who have shorted bubbles have gone bankrupt while the market kept going up. Never bet against the market.

        • As a speculator your job is not to worry whether you are right or wrong but to make money whether you are right or wrong. For example in an extreme case if you are wrong 80% of the time and lose 20 and you are right 20% of the time and make 100 when you are right your expected return is 20-16=4
          You still make money by being wrong most of the time. The job of. Speculator is to make money whether you are right or wrong.

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  12. Greetings, this is my first comment on this blog.

    I am preparing my financial market report for the week ending January 17, 2014, where I write from the dispensation economics viewpoint. I am theyenguy. I blog at EconomicReview Journal, where I present the monetary thesis of “The Dispensation Economics Manifest”

    Jesus Christ, through dispensation, that is the administration of all things economic and political, produced peak liberalism on January 13, 2013, which came via currency carry trade investing and debt trade investing. Liberalism’s peak investment experience is seen in the ongoing six month Yahoo Finance chart of Shipping SEA, Global Financials, IXG, Nation Investment, EFA, World Stocks, VT, Greece, GREK, The Eurozone, EZU, and Denmark. EDEN ….

    Economic Destructionism is the new normal replacing Economic Inflationism. The terminal phase of Liberalism, began with Ben Bernanke’s QE1. The years 2009 through 2103 was the zenith of the paradigm and age that featured the economic action of increasing inflationism, where there was a Great Swell in balance sheet of the US Federal Reserve, fiat wealth, such as World Stocks, VT, and M2 Money, as well as Total Credit, where the goal of monetary policy was investment gain. Economic life centered around the investor and investment choice, and which carried impact in economic metrics such as increasing GDP, such as automobile production, and increasing employment in the financial sector; the latter were not goals, but simply statistical attributes associated with risk-on investing.

    On October 23, 2013, Jesus Christ opened the first seal of the Scroll of end time events, and released the Rider on the White Horse, as seen in Revelation 6:1-2, to affect a global economic and political coup d etat. His ride over the world PIVOTED the world from paradigm and age of liberalism into that of authoritarianism.

    With the bond vigilantes calling the Benchmark Interest Rate, ^TNX, higher from 2.48%, economic action, has changed from one of inflationism to one destructionism, where there is the “dreaded experiences”, specifically the death of fiat money, the death of fiat wealth, economic deflation, nation state default on Treasury Debt, economic destruction, disregard for personal property, disregard for person property rights, and disregard for people as persons.

    The Benchmark Interest Rate, ^TNX, that is the cost of US Treasury Debt, TLT, was formerly the Means of Economic Inflationism. But, with its rise from 2.48%, on October 23, 2013, it commenced the failure of trust in the monetary policies of credit stimulus of the Creature from Jekyll Island, and the economic policies of investment choice of democratic nation states. Now, The Interest Rate on the US Ten Year Note, ^TNX, is the Means of Economic Destructionism, establishing economic deflation and economic recession, terminating economic inflation and economic growth, and thus terminating the paradigm and age of liberalism, and birthing that of authoritarianism.

    As investors become entrenched in their new role of debt serfs they will be derisking out of debt trades such as Global Telecom, IST, like France’s, ALU, Finland’s, NOK, and Leveraged Buyouts, PSP, like the UK’s, DORM, and deleveraging out of currency carry trade investments like the UK’s, PRU, LYG, the Netherland’s, ING, and Ireland’s COV, CRH, STX, ACN, IR, MNK, PRIA, TRIB, and IRE. The result will create a global whirlwind of economic deflation and economic recession, like the world has never seen; something far disastrous than the financial bust of 2008.

    Competitive currency devaluation, is active in producing debt deflation. Monetization of debt is bearing its fruit. Japan’s Nikkei, NKY, led Nation Investment, EFA, lower. The Australian Dollar, FXA, led Major World Currencies, DBV, and Australia, EWA, and Westpac Banking, WBK, and Australia Dividends, AUSE, lower, as International Treasury Bonds, BWX, traded lower. Emerging Market Currencies, CEW, led Turkey, TUR, Malaysia, EWM, Indonesia, IDX, and Mexico, EWW, led the Emerging Markets, EEM, lower, as Emerging Market Local Currency Bonds, EMLC, traded lower.

    Greece, GREK, and the National Bank of Greece, NBG, led the Eurozone Nations, EWI, EWG, EFNL, EWN, EWQ, EIRL, EWP, EWO, and PGAL, lower, as Eurozone Debt, EU, traded lower.

    Aggregate Demand will be falling lower as a number of black swan events will cause Short Term Interest Rates to rise, resulting in Financial Apocalypse, that is a global credit bust and worldwide financial system breakdown foretold in bible prophecy of Revelation 13:1-4; these will be the genesis factors for the rise of regional governance and totalitarian collectivism.

    I hope you, and your readers will come by and visit my blog soon, as I continually strive to present both grace, meaning resource, and truth, meaning that which is reliable for belief or a trustworthy promise.

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  17. The housing price bubble is beginning to inflate and the reason is due to demand and supply becoming equal only when the price is high. In other words the rate of building and of the availability of sites of land for this is lower than it might otherwise be. A sensible government will try to reduce this rise in prices by making more land available. There is some unavailability due to local government control, but in fact the largest amount of the natural opportunity is due to the land owners who are holding land out of use whilst its price rises. This land value speculation is exactly the reason why we had the financial crisis in 2007. Banks who led money to potential land owners think they know when they are on to a good thing with their mortgaging process, because it appears that this progress cannot fail to bring in the interest on the loan as well as its eventual return.
    A sensible government should tax land values and so put an end to land withholding, since this tax will no longer make land ownership without it being properly used to be worthwhile.
    I am surprised that for all the above comments nobody else seems to know what should be done to deflate the bubble tendency of our macro-economy for good. This is how.

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