Is the property market bonkers?
‘Bonkers’. I hear the word repeatedly whenever discussing the West Hampstead property sales market with buyers, sellers and fellow agents alike. Even people with no recent first-hand experience tell me it’s bonkers.
Newspapers and websites tell us how bonkers it is. A headline in The Sun on Friday reads ‘Property up 2% in a month!’ and goes on to say that this is ‘fuelling fears a property bubble is looming’. Hardly a day goes by without The Daily Express fixating on the impending doom across its front page.
But how bonkers is it? Is it really a bad thing for London and Londoners? A recent article in the Guardian got me thinking; it tells how a central London property investment company has recently set up a £100m fund (or ‘warchest’ if you’re reading The Sun) to buy 1 and 2 bedroom apartments in prime central locations. The company’s reasoning is that the property price inflation seen over the last 40 years is set to continue at 9–10% per annum for the next 30 years at least. They say they can see no reason for this to change and it’s difficult to argue that they’re wrong: a growing population, strict planning laws, conservation areas, limited space and foreign demand and investment are unlikely to change. Their prediction – and gamble – is that by 2050 a central London flat will cost £36m.
This seems unimaginable and enormously unfair for many people, but made me realise that this is one of the reasons London is such a great city. The London property market creates huge wealth and prosperity due to the ‘multiplier’ effect of capital injection into services, employment and investment.
Much is made of overseas investors buying properties in London and never living in them but, in my experience, these people employ local surveyors, solicitors and agents when buying and then embark on expensive refurbishment programmes which employ local contractors and firms, increasing the value of the property and in some cases, gentrifying poorer neighbourhoods, setting new benchmark values for other properties in the process.
The London construction industry alone counts for 10% of the UK’s GDP and employs nearly 2 million people. Office development in London is now at a 4-year high with 9.7 million sq ft under construction and notable recent landmark sales including Google’s purchase of its new headquarters at Kings Cross. The knock-on effect of such investment is huge.
This wealth generation also helps create demand and employment opportunities that attract people from all over the world to London, adding to the multi-cultural mix of Londoners that want to buy property whilst giving it such vibrancy and diversification. This is what we all love about London – would we really want West Hampstead and West End Lane to feel any different?
Homeowners in London also benefit from the consistent rise in prices by being able to unlock large amounts of tax free equity in their homes which they can reinvest into businesses or help future generations get on the housing ladder.
Of course, those yet to get on the housing ladder, or who need to move to a bigger property, are finding it increasingly hard to make London their home as house price rises outpace wage inflation. The risk is that while London might become more diverse in some ways, in others communities like West Hampstead could become more homogenous as only the relatively affluent can afford to buy here, while everyone else is forced out of the city and onto those crammed commuter trains that run through our Thameslink station every day.
So, yes, it does all seem a bit bonkers, and perhaps inequitable for those that don’t live in London or are priced out, but the ripple effect of investment and increasing prices is felt across the whole of the UK eventually. It also makes London an incredibly vibrant, eclectic and exciting city.
Darryl Jenkins
Associate Director
Benham & Reeves
West Hampstead
020 7644 9300
Follow @BenhamReeves
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There are two points to consider here:
1. West Hampstead relative to London prices (most notably it neighbouring areas) – in which I would argue its is relatively not so bonkers
2. The London market as a whole to which I would argue it has definitely started to get a bit bonkers
On point 1. West Hampstead doesn’t seem to have outperformed comparable (if not quite as nice imo) Queens Park where houses are £1,000/ sqft and up it would appear from a quick look at asking prices (20% higher than West Hampstead) and skewing the average for the delightful borough of Brent. Or South End Green (Gospel Oak as I used to call it). It also nestles between Hampstead to the East with far higher prices (2x higher?) and St John’s Wood to the South with even higher house prices (up to 3x). Some halo effect, as people seek more space for an extra tube stop, should arguably have had more effect on little West Hampstead. Arguably the effect of Nottinghill-ites daring to cross Harrow Road has done this to (questionable) Queens Park.
West Hampstead has great transport links and a good housing stock from huge detached houses in South Hampstead, the more modest Victorian terraces and the Edwardian mansions blocks. It has an improving high street that despite its growing pains transitioning from charity shop, kebab shop, estate agents and pizza takeaways, has plenty going for it.
So despite being bonkers in absolute terms at 20% less than Queens Park, half the price of Hampstead etc. it isn’t all bad…
However…..
On point 2 which seems to be the basis of the argument; price rises are not sustainable whilst maintaining the current social mix. Over the next few years business will have to consider relocating outside London for back office functions where workers get priced out or commutes become unwieldy. This would have a dampening effect as demand subsides. All the time I see young colleagues increasingly priced out of central London and buying in parts of London I have never even heard of, let alone considered myself when I was their age.
The influx of foreign buyers should also find its own dampening effect as the very reason they are attracted to London, its vibrancy (and liberal tax regime on non domiciled residents), i stifled by the increasing prices and as London becomes some form of pastiche of itself for Russian, Chinese and Middle Eastern billionaires. See damning start to this NYT article: http://www.nytimes.com/2014/03/08/opinion/londons-laundry-business.html?smid=tw-share&_r=0
As with every bubble people will tell you it is unstoppable and it will go on forever – hurry now before you miss out; it might be higher tomorrow; flats will be £36m! That is what makes a bubble.
But property is just a commodity.
Supply will increase as prices attract more development – see again little West Hampstead and the tricky sites currently being developed or being proposed to be developed. Demand will subside as prices rise faster than incomes and become less affordable and if we get to the tipping point for more London businesses to relocate staff outside the M25. A Disney-fied soul-less London and taxes on foreign ownership and a new ‘hot hot thing’ will eventually put off the fickle international billionaire set.
But as yet I haven’t seen their Bentley Continentals and Lambos clogging up West End Lane.
And on the sub point of equity withdrawal;
Buying a house is the biggest and riskiest investment most people will ever make.
Most people start by owning as little as 10% of this asset, with the bank owning the other 90%.
Obviously this means if your house price goes up 10% your equity has doubled but conversely if your house price falls 10% you have no equity and so on.
The notion that you should see you house price as a source of income is an absurd one in a post-financial crisis world.
Over time you should be glad your equity percentage is rising either by repayments or (if you are very very lucky) by house price inflation. But the notion you should keep the risk high and the leverage up by drawing equity on implied price increases in an illiquid asset is strange to say the least.
It is far from clear to me that there is any economic benefit in house price inflation and if as the writer suggests, it is used for equity withdrawal, it simply increases risk in the system and makes the crashes harder.
If I may be a little tongue in cheek: I am still not fully clear if Mr. Jenkins is serious, or if his post is intended to be a parody.
Regarding those that are “priced out”, which he almost dismisses with a few small comments: these are the people that provide vital services that Jenkins and all of us here gladly use and rely on every single day. Nurses, police, firemen, clerks in stores, etc. When the people providing the most basic services are “priced out”, it is time to step back and re-think. When you consider the impact on these people and their families, one has to wonder if the ‘bonkers’ property market really helping the greater good as Mr. Jenkins claims. Or simply reinforcing inequality.
A completely different aspect is that if one compares internationally, people are paying unbelievably high prices for property that is sub-standard and outdated. The only way this can represent an investment, is if pricing doesn’t reflect factual value, but perceived value. Taking a historical perspective, there was a time when the perceived value of a single tulip bulb was roughly the value of a house (The Dutch Tulip Mania and first financial bubble) … did that equal the factual value? I leave Mr. Jenkins to answer that.
The idea that rising property prices help to *promote* diversity (“adding to the multi-cultural mix of Londoners that want to buy property whilst giving it such vibrancy and diversification”) is one of the most egregious pieces of doublespeak I’ve ever seen.
“overseas investors … employ local surveyors, solicitors and agents”
How excellent to have an economy built on such international, world leading skills!
Brian
in West Hamp£tead