London is famous for the obscenely high prices of its property. Throughout the years many economists and analysts have predicted its crash, but the capital’s real estate market has proven everybody wrong time and again. There is something irrational in the way in which the market behaves on the basis of tradition rent to price indexes, but there are also several reasons, explaining this behavior.
London house prizes are often seen as a bubble, just waiting to pop. It may be that the moment will come, but the fact is that the pop has yet to be heard, leaving professional forecasters and economists tearing down their diplomas in disbelief. Predictions always seem to fail to materialize property prices just keep on rising, often against the global market’s logic. But London’s housing market has a logic of its own and several factors contribute to that.
First of all, real estate is very different from other investments, because they always provide a nice cushion for people, even in the case of a drop in value; people can still live in or rent property, which gives real estate investments additional value through safety. The same cannot be said of many other kinds of investment.
Also, London is overpopulated and there is a deficit of housing supply in the city. Living in the capital has many positive sides that keeps housing demand on a rise. And high demand always leads to high prices. So, houses in the capital serve as an insurance policy for many homeowners, who assume that they can rely on the property’s equity not dropping below a certain threshold even in the worst case scenario. But with the current economic situation, things could very easily go wrong and even the “indestructible”
London house market might crumble. Just as the American market fell in 2008, New York included.
Bruce Packard at Seymour Pierce points out that the ratio of household debt to disposable income is now 150%, which is higher than it was in America, when the crisis hit. For now the prices are not going down, and that’s mainly because not many people are forced to sell yet, with interest rates being kept low and banks still trying to be understanding on the subject of arrears. But if interest rates increase, the situation will likely change dramatically.
It’s a fact that the market is shaky everywhere and perhaps it’s only a matter of time before people realise London property isn’t bulletproof against global economic troubles. The situation in Greece is continually causing panic. And with Spain already on the ropes there aren’t very many reasons to believe that London property would sustain its reputation of a safe haven for very long.
There are also other factors that might cause the market crash. Many analysts believe that inflated city bonuses swelling prices in central London and the more affluent and upmarket suburbs have lead to a snowball effect throughout the London market. With that landscape changing drastically and bonuses being slashed across the board in the city that is likely to mean that its employees simply can no longer afford to pay the rents and prices they were once willing to. If prices in central London drop even a little, many think that the knock-on effect rippling out through the cities sprawling suburbs will gather pace and a major correction may swiftly follow. If that scenario doesn’t eventuate it will not be the first time a predicted doomsday scenario has not materialised in London. Then again, the skewed fundamentals suggesting that time must come are more apparent than at any previous point.