Is London experiencing a property bubble?
5th February 2014
In property, the tem 'bubble' is pretty emotive, the monster under the bed ready to leap out to bite the unsuspecting property owner or investor. A bubble is a situation where there is an inflationary increase in the value of a product that is self-perpetuating and unrelated to sustaining factors. It is expands because people believe it will continue to expand and invest further to benefit from this expansion. It is self-perpetuating until the point that it, as does any bubble, pops. To say that London is in a housing bubble is to say that demand is mostly driven by speculation and without the expectation of short term increases in value this demand would fall.
I think it is safe to say that the property market in London has at the very least received a massive injection of steroids over the last year. A studio in Chelsea for which we were struggling to achieve £430,000 18 months ago has recently received an offer of £570,000. A property in Bloomsbury we currently have under offer at £560,000 received two asking price offers within 48 hours of marketing it from buyers who were prepared to take it unseen. It is undoubtedly an excellent time to sell but does that make it a bubble?
The reasons I hesitate in describing the market as bubbly is that the nature of demand and supply in London has changed so much over the last few years. So many people all over the world wish to buy property in London and the world is a very big place. The bubble of the early nineties was fed from within the UK market without the fall back position of overseas demand. Also the private rental sector in London has grown enormously - helped, ironically by the growth in property prices. It is this growth that has created a whole new private landlord sector that has sustained demand for properties and creates a fall-back position if prices falter - if you cannot sell you can always let. The price rises are certainly predicated by lack of supply (the money markets have taken such a battering over recent times that property seems a safe investment that people do not want to lose), but even if this supply increases (as it surely must - and when you decide to sell, don't forget to ask us in to pitch) there is still such massive international and commercial demand that a precipitous drop in prices seems extremely unlikely.
And if it is a bubble, who would be hurt by the popping? Anyone who has held property for over five years has seen such capital growth that even a market correction will not be truly damaging, provided of course that they are not over-leveraged. Market drops usually affect the first time buyers who purchase at the top and find themselves suffering painful negative equity, though if they hold on to the property long enough the market will eventually come back. Judging from our position, there are there are precious few first time buyers in Central London anyway- they have been priced out a long time ago and it would have to take a seismic bubble burst to bring them back.
Our conclusion? It is certainly a seller's market for those who want to take advantage, but a bubble? We will just have to wait and see.