“Foreigners have an unhealthily strong desire for London property”.
This is the view of a Reuters Breaking views’ columnist. Good headline grabbing stuff although I am not quite sure for whom the desire is unhealthy.
Of course, there are concerns that London house prices are in bubble territory. If judged against the earnings of London residents then this would appear to be true. Of course, if judged against the earnings of international buyers, a different story emerges.
“What about yields?” growl the bears. Net yields of below 3% look derisory.
“Compared to what your bank is offering, the yields look positively favourable” roar the bulls.
“Ah ha, but why then wouldn’t I buy a selection of high yielding blue chip shares that yield 4+%?” snarl the bears.
“Because you can’t live in a share certificate and property will never go to zero unlike shares” fume the bulls.
Indeed one of the reasons why property across the globe has been an excellent store of wealth over the long term is that people tend to hold onto property for far longer than they do shares, gold, commodities, etc. Most people are psychologically ill-equipped to hold other assets for the long term”.
And so the argument goes back and forth- as in any market there will always be bulls and bears, buyers and sellers. Of course, this is a rather short and simplistic look at where we are in the London property cycle. The point that I am making is that there are numerous arguments for both further gains in the London property market or potential disasters. Alternatively the market could just meander along at a snail’s pace for years to come.
Making forecasts is always dangerous. Even more so now that various governments are injecting counterfeit money into markets though quantitative easing, which makes it rather hard to judge what is happening. What we unequivocally know is that the QE boosts the wealth of the richest through massive increases in asset prices, i.e, the money has not been transmitted as governments had hoped.
As the latest celebrity economist, Thomas Picketty, has shown, the gulf in wealth is growing between those with capital and those who strive to improve their lot through the income they earn through their job. That is to say, a minority are becoming exponentially richer through the rise in capital values and the income streams they earn through these assets- dividends, rents, etc.- while the typical wage has been falling in real terms for several years if not decades. Hence the growing gulf between “the rich” and “the poor”.
It is impossible to judge how long QE and ultra-low interest rates can continue or indeed what the ultimate outcome will be. There is an astonishing and ultimately unpayable amount of debt in the world (in real terms). This will be washed out of the system either through inflation, deflation or a higher combination of the two.
Those who have benefitted the most from the current situation are understandably hedging their bets. In short, London property is one of the preferred ways of hedging against massive inflation. It is also a bet on its continued success as a global “mega-city”. Only time will tell whether London will continue to build on its underlying advantages and strengths.