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Is there a house price ‘bubble’ in London?

Is there a house price ‘bubble’ in London?

Booming house prices in London have led to growing concerns that a dangerous ‘bubble’ is forming that’s set to pop any time soon.

While house prices can certainly go up as well as down, talk of a property price bubble at this stage is premature. That’s not to say that prices won’t stabilise, or perhaps even drop a little at some stage, but the long-term picture looks positive for property investors.

Let’s take a look at what Paramount Investment think about housing market…

What’s a ‘bubble’ anyway?  

Housing bubbles traditionally start with an increase in demand, usually due to limited supply. Of course, it helps that currently interest rates are extremely low, which has enabled buy-to-let landlords to build up their property portfolios. Not only that, over the last few years we’ve witnessed the rise of the ‘accidental landlord’, with people moving out of their London properties and renting them out.

When speculators enter the market, they tend to try to make quick profits through short-term buying and selling. In the property world this is known as ‘flipping’. However,  at some point demand usually decreases as more properties are built and there’s a sharp drop in prices; hence bursting the bubble.

The supply problem  

One of the big issues with property in London is the lack of supply. And this doesn’t look likely to change any time soon. In fact, as job opportunities increase in London and the Eurozone fails to pick up growth-wise, more and more people are seeking to move to the UK capital putting further pressure on housing.

Despite talk of price falls at the luxury end of the market, house price growth picked up to 12.1% in the year to the end of September, according to official figures, and there was an 18% annual rise in London prices.

So, when are these much-needed properties going to be built, bursting the bubble? Potentially never. There’s a reluctance to build on the greenbelt, even though less than 10% of England is developed. And there’s a large proportion of voters, most notably the Babyboomer generation, who live in the Home Counties. This section of the population would not be happy if excessive building were to go on in their areas. In other words, NIMBYISM. Interestingly, less than 50% of the land that’s built over is covered in concrete, with parks and gardens covering more land than houses in cities.

Mansion Tax

As prices have soared over the last few years, a multitude of paper millionaires have been created. It’s therefore unsurprising that the prospect of increased taxes on unearned capital gains has been floated by the Labour Party and supported by the Liberal Democrats in the form of a Mansion Tax. And as the renting sector grows, there’s likely to be a shift in voting power away from the older generation and homeowners and towards the young in rented accommodation.

Although we believe that the Mansion Tax is terrible economic policy that will probably backfire, some experts claim this will push prices down. While this could happen temporarily, it doesn’t necessarily mean that the housing crisis will be resolved. If there aren’t enough properties to accommodate the burgeoning population, there will still be upward pressure on prices in the long-term.

London prices are booming due to a lack of supply, low interest rates and rich global investors putting their money into the market due to international instability. While the UK offers a favourable tax and legal system as well as political stability, it will continue to be seen as a good bet. Unless a drastic home-building programme is introduced in the next few years, prices will remain buoyant.

Image credit: Luc Mercelis

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