Five signs the London property bubble is reaching unsustainable proportions

One of the biggest misconceptions in economics is that it’s difficult to spot a bubble. On the contrary: spotting a bubble is actually pretty easy. The difficult thing is predicting when it’ll go pop.

So let’s not beat around the bush. London is facing a house price bubble. House prices in the capital are rising at unsustainable rates. On almost every reasonable measure of affordability (we’ll get to them in a second) London property prices are at or beyond what would normally be considered danger levels.

The sensible questions to ask now are: how long the bubble continue inflating, how will it come to an end (a pop or a long period of relative deflation) and whether it will cause systemic financial turmoil elsewhere. It’s these questions the Bank of England’s financial stability team are privately investigating as they watch the rise in regional UK house prices with a mild degree of horror.

Evidence of bubbly activity in London’s property is nothing new. We first reported on the growing gulf in house prices about a year and a half ago. About six months ago our update showed that the affordability levels in the capital were at unprecedented levels (of unaffordability).

Since then, things have only become even more pronounced. Let’s run through the evidence.

1. Prices are rising very fast

Today Nationwide reported that house prices in London are rising at a rate of more than 18% – the highest rate since 2003. According to the building society the gap between London and the rest is greater than it has ever been before (though it was at a historic level even before the latest iteration of its survey).


2. Prices rises are no longer just in “prime” areas

What’s particularly interesting about the numbers is that what previously looked a lot like a well-contained bubble in prime London property prices (eg the smart parts of town where overseas investors are particularly keen to buy) has spread out into other parts of the capital. Just look at the table below: the biggest increases were in Brent and Lambeth, rather than Westminster and Hammersmith & Fulham. Though Kensington & Chelsea prices are excluded from the Nationwide numbers, Land Registry data suggest house price growth has slowed there too.


However, rising prices are not, on their own, evidence of a bubble. Prices in Manchester were also rising by around 18% over the past year. What makes London different is the performance of house prices in comparison with peoples’ ability to afford them. Now, there are a few ways to judge whether house prices are at sustainable levels. One is to compare them to the rise in other prices around the economy – in other words working out the real level of house prices, adjusted for inflation.

3. Prices are still high in real terms


On this basis (see the above chart, which looks at real vs absolute prices in the London market since 1988), London house prices are still a touch below the levels they reached in late 2007. The recent rise looks far less pronounced. The important thing to note, however, is that remain considerably higher than they were in previous decades.

This is a useful yardstick, but a far better measure of affordability is to compare house prices with people’s earnings – after all, their capacity to afford a home will depend in large part on how much they earn. On this measure, the disparity between London and the rest (and, for that matter, history) is striking.

4. House prices vs earnings are at historic highs


According to this chart, house prices in London are now more unaffordable (compared to earnings) than ever before in recent statistical history. It’s often thought that the “safe” level for house prices vs earnings is about three times, and that once you get beyond four times you’re moving into difficult territory. These numbers show that for the first time, the average London house price is now eight times the average first-time buyer’s salary.

However, what this measure doesn’t show you is the impact lower interest rates have had on families’ mortgage payments. The Bank of England has cut Bank rate to 0.5%; mortgage costs have fallen sharply in the past year or so thanks in part to Funding for Lending. And as a result, even though the absolute level of house prices is higher than ever before, is higher than ever before vs salaries and the necessary mortgage amounts are greater than ever before, the monthly mortgage burden faced by most first-time buyers is not.

5. Mortgage burden hardly dropped in London


This chart shows you mortgage payments as a % of take-home pay by region. As you can see, mortgage payments still account for an average of more than half of first-time buyers’ salaries, but this is considerably lower than in 2007 or, for that matter, the late 1980s. It’s this chart that many people refer to when arguing that house prices at their current levels remain sustainable. The problem with this argument is it ignores the fact that whereas in most periods when the mortgage burden was 50% or more Bank rate was close to 5% (or double that in the early 1990s), it is currently at a 320-year low. The only way is up.

Moreover, what’s striking in this chart, and in most of the others above, is how different the London story is to the rest of the country. Housing affordability in the capital is at its worst level ever, on most metrics. Even on the mortgage burden metric it is far, far above most of the rest of the UK, and never fell as much as it did in previous corrections.

It was possible to argue, until relatively recently, that this was merely a “prime central London” phenomenon – money rolling in from overseas investors to pay for nice, sparkling new apartments in Battersea. Not any more: prices across the capital are rising at unsustainable levels – not just in prime areas. There is growing evidence that households in London are having to take on unprecedented levels of debt to stay afloat – almost a fifth of new mortgages being taken out in London are for more than 4.5 times the buyer’s salary.

In other words, this is already a systemic financial problem. The London bubble has been growing for some time (and, by the way, Help to Buy is likely only to have had a marginal effect on this phenomenon, though it certainly won’t help). Other prices of the UK may well face their own bubbles, but right now they are not in that kind of territory. So contrary to what some commentators claim, there is no nationwide bubble. London is another matter entirely.

House prices in the capital cannot keep rising at this rate. At some point, either buyers will be unable to afford property or investors will be unwilling to accept falling yields (they’re already coming down) and will realise capital appreciation can’t carry on forever (whatever currency you’re buying in). However, saying all of the above is no guide as to when the moment of capitulation will come. No-one knows. It could be months; it could be another few years. The path will depend in large part on which party wins next year’s election and whether the winner imposes a mansion tax. It will depend on when interest rates go up and how quickly. 

Either way, it’s high time the Bank of England, and, for that matter, the Government, put a little bit more time into thinking whether they need more tools to try to deflate the capital’s bubble safely and smoothly, without making the rest of the UK’s regions suffer.


24 thoughts on “Five signs the London property bubble is reaching unsustainable proportions”

  1. Why do house price commentators compare the average UK income to London house prices as if there is some unfair inequality in our housing price system? London is not for those on the average UK income; it is for national and international high achievers who in accordance with the laws of supply and demand are able and willing to pay the going rate for a house in an international city, London.

    Generally these high achievers and/or their forefather’s have seen the value of a good education and hard work and worked hard at achieving both. If you want to move to a socialist/communist society where irrespective of how hard you work a few are awarded a £5 million Mayfair flat then argue for a completely different political system. Those systems are unfair fraught with bribery and corruption and eventually fail.

    Politicians and the ‘Not In My Back Yard’ brigade have created high house prices through restrictive planning policies. The affordable housing policies are a disingenuous sticking plaster. Instead of governments concentrating on covert confiscatory tax regimes to fund houses for people who have not worked sufficiently hard to be able to afford to live in those particular houses it should concentrate on its real underlying failures and be exposed by commentators like you until it does. Until Michael Gove’s intervention, these being failures to create an education and aspiration system that makes it possible for anybody to become a high achiever and afford the market price.

    Prior to the much needed housing benefit restrictions we had a more confiscatory tax regime that paid for low achievers to live in £100,000 and more per annum Mayfair flats. The fault did not lie with the property owner, as was so often portrayed by commentators, but in a Government deceiving the electorate into believing that without sufficient effort they were entitled to dine in the best restaurants.

    Average incomes in relation to the average house prices in the geographic regions where those on average incomes should welcome as places to live are not out of balance. The economics of all housing would crash if they were. So why take Mr and Mrs Average and present them as unfairly being unable to live next door to Mr & Mrs Harder Worker & Higher Achiever?

    Fuelled by house price commentators the only thing out of balance is peoples’ expectations that they should be able to drive a Rolls Royce without having to work any harder than they would work for a Ford Focus, or dine at the best restaurant without working any harder than they would work for a plate of chips.

    Mr & Mrs Average is often hard working but they have chosen work sectors, or not educated themselves sufficiently, and therefore work in work sectors that the rest of society do not value in the same way that it values the work sectors that support property prices in an international city.

    As the voice of the people it is about time housing commentators properly commentated on the underlying causes of any mismatches in the housing market and not the myths propagated by vote seeking governments. While much more is now being done, we might then get an administration that rolls its sleeves up, deals with the fundamentals, and makes the UK and its people into an aspiring successful nation. An economy in which we can all afford to live in London through choice and hard work and without support from a taxation system that condemns people to aspire to become society’s victims to meet the low expectations of the system rather than motivating them to achieve the very best for themselves and their families.

    1. Mr Lander, just where do you propose that London’s firemen, policemen, nurses, road sweepers, binmen, civil servants, teachers secretaries, transport workers, cleaners etc etc live? Should they be bussed in from Lincoln every day because they don’t ‘work hard’ enough to earn a six figure salary? You are not living in the real world.

    2. “Mr & Mrs Average is often hard working but they have chosen work sectors, or not educated themselves sufficiently, and therefore work in work sectors that the rest of society do not value in the same way that it values the work sectors that support property prices in an international city.”

      No “high achiever” could write anything this sloppy and incoherent.

      Too much of this country’s wealth is in the hands of snotty people who got lucky. They prefer to tell themselves that they deserve their luck because other people don’t work as hard or aren’t as clever. A ghastly, self-serving attitude.

    3. You seem to be labouring under the delusion that the above affordability metrics are comparing London prices with overall UK wages. I’m not quite sure why you have that impression. I can’t speak for the Nationwide figures but my own house price vs earnings figures for different UK regions (see the second link in the blog) are based not on the UK average wage, but the median wage of residents in those specific areas. I suspect the Nationwide numbers are as well.

    4. ‘Chales’ Lander? ‘Chales’? Really? ‘Land-er’, under a piece on property prices? Were whoever you are in such a hurry to troll this article you didn’t even take the time to enter a proper name.?

      Making this about Gove’s Murdoch tabloidisation of our schools being the way for plenty to earn the money to pay these prices is insane, by the way. By the time these free schools have sucked all the money out of the education budget their products will be as ignorant as pigs in the proverbial and just as blissful.

    5. An interesting comment but sadly not true. The entropics of situation and societal macro events such as free money from london price rises for incumbent or unworthy owners, or local deprivation upon the hard working educated and motivated, dismantle the myth of a mr and mrs hardworking high acheiving.
      There are only those with and those without. Yet, with and without work equally hard in many cases and in many cases are equally well educated and motivated. Ie An astro physics teacher or genetics researcher working 14 hour days for peanuts is not worth less than an investment banker working similar hours.

    6. I am not sure if this is a brilliant parody or just the plain idiocy it appears to be.

      This idea that elites rise to be so because of their inherent virtue and hard work was shown up in the nineteenth century for the bunkum it was. Wealth, moreover, is returning to its stable, self-perpetuating nineteenth-century form, and so is losing its relationship to any sort of hard work at all. Many of those being priced out of London, meanwhile, are working very hard indeed, and often in more socially useful ways.

      I don’t know if you have heard but there used to be an idea that society was made better by the variety of aspiration of its members. The single-minded, obsessive people you seem to admire who have sought before all other considerations to maximise their wealth recognised that they nonetheless needed people around them who had other ideas of life. People who wanted to become teachers or librarians or priests, people who wanted to take care of the sick, people who wanted to run sports clubs or orchestras. They did not feel that such people should be penalised or evicted because they had chosen “declining sectors” – if this is an appropriate paraphrase of your most illiterate paragraph.

      Your vision of life and society, in which great cities would be homogeneously inhabited by a self-congratulatory financial elite that had lost all contact with everything creative, nurturing and even just plain interesting, holds rather little to entice the rest of us.

    7. Dear Sir

      You obviously have no understanding or have any life experience. It is clear that you are either one of those high achievers (which in real world has no connection with ability but with networks and wealth) or you have lived all your life in a bubble. Neither of those options assume that you have enjoyed top education that has broaden your knowledge or understanding of the world you live in.

      You don’t have to be a socialist to worry about the huge wealth gap between generations and horizontally within generations. There are many studies and historical analysis pointing to one crude reality, extreme poverty and substandard living conditions generate social distress. You think yourself poverty proof in your ivory tower while you gaze peacefully or with disgust at us those that work 14-16 hours per day which are sadly classed as non-high-achievers.

      I suggest you stop doing that because nobody is poverty proof any more however many diplomas you have or what your parents did. Even real property value can vanish in times of social and political conflict. Businesses are ever more volatile in a globalised competitive market. Even what you know can overnight be useless, to this effect I would encourage you to start reading about the mid life career change trend. For those just embracing puberty now it will be necessary to go back to re-educate mid life because the knowledge they would have initially acquired would be obsolete halfway.

      So ask yourself this, when you say high-achiever or when you start promoting the archaic meritocratic agenda, are you really representing your own interests?
      I would say that in your naivety and narrow view and experimentation you are simply ignorant to your own situation. Actually I think you cannot distinguish between humanity and socialism, I doubt you have specialist knowledge of any.

      So why pick on the tone of the article and the journalist that wrote these wise words, which outside your bubble, are very well known?

      My guess is that you consider yourself above average or allocate some value to your own life that is superior to the value of the majority. In your presentation of Mr & Mrs Average you seem to have missed the fact only someone truly superior can cast such judgement, but you, commentator, seem to be truly oblivious that you are also part of this society and by no means poverty proof. There is nothing about your flawed slightly hypocritical uninformed argument that suggest to the wider audience the presence of knowledge or rationality, or superiority which would grant you the permission to cast such a judgement.

      So now let’s analyse you ideas and see how below average you are in terms of intellect. If I am right you are literally bound to be in my position when your funds have been blown on luxuries for which children in far east have slaved. Never mind the last point, I assume those that are poor don’t work hard enough, including children. Even better am I right to assume that in your view children that are poor should not have been born? Have I struck a cord with that last comment? Good!

      1. Knowledge about earning per capita

      When you are speaking about high-achievers you are speaking about less than 10% of the population that enjoys incomes of over £150,000 per year. If we globalise this figure then you are really looking at around 5% of the world population. So let’s dig deeper and understand how people like those made money. If you did some research you would find that about 80% have inherited or originate from families that have historically been affluent or that have created that initial wealth on the back of sub-human working condition, slavery, unfair trading, industries that consume and view humans less valuable than equipment.

      It is obvious that you have no idea of statistics or scale, so in my view your assumptions are definitely not based on quantitative data.

      Now let’s look at quality data. I see no reference to specific cases, research or personal experience, which I personally could not expect. You are indeed just making inflammatory statements based on lack of knowledge, ignorance and borderline eugenic views.

      2. Economics of housing, London and morality

      You have tried to outline some reasoning for having a huge discrepancy between income and costs of owning a house. From what I can understand it goes something like this:
      – it is preferred to have only high-achievers owning property, I see no clear point whether this is only in London.
      – this discrepancy is the quantified value of hard-work. you are actually making a case that if you cannot afford a house in Mayfair then it logically (your logic) means that you don’t work hard enough, therefore it justifies the fact that is it good you cannot afford it because it would be an abomination if a non-high-achiever could afford to live in Mayfair.
      – that for you geographic variation means nothing, you heart is set on a meritocratic agenda and it should apply uniformly everywhere.

      The above means that you believe it is economically healthy for the 90% majority not being able to afford housing, because as you say, Mr & Mrs Average which apparently don’t work hard enough should not enjoy suitable housing.

      You clearly have a very superficial view of economy, if markets were left truly free and no control was imposed through taxation, regulations and other legislative instruments, no economy in this world would have survived. I feel that it is below my standard to suggest you read more about the economies of central African countries to see what a non-controlled market truly means. Maybe you will find out things that will enlighten your mind, at least this is what I hope and pray for.

      I am particularly impressed by the thought and feeling you have put in this line: Mr & Mrs Average is often hard working but they have chosen work sectors, or not educated themselves sufficiently, and therefore work in work sectors that the rest of society do not value in the same way that it values the work sectors that support property prices in an international city.

      You 1) have generalised that hard work = money, 2) that you need to be educated to earn money, 3) that average people are not educated and not hard-working, 4) that even if they are hard workers they haven’t picked the right sectors which means that wow you have committed the ultimate sin in an argument.

      You have provided me with the key to your incompetence and subjective, very disturbing, mind.

      Point no 4 – you state that it is because people have not followed certain career paths that are not high-achievers. That doesn’t mean they are not educated, it means that they have made the wrong choice.

      You morality is questionable, like many other things, but ask yourself this: If we were all investment bankers in the City, who would save your life or your child’s life in an accident, or who would take care of your child while you are at work, who would pave your streets, collect your waste, produce your car, clothing and food? Are all those people worthless to say the least from your comment? Are all those people the result of wrong choices? If they are so average and so wrong what would you do if you have to live your child in the hands of a society filled with 90% of average people?

      Friendly Advice

      My dear, you need to leave your Mayfair flat and start volunteering, leave the country but not on holiday to discover how life is really like. You need to open your eyes, maybe you will understand that intellect and hard work has no correlation to income, that economic health for the majority is good for the few rich ones as well and sustainable.

      If after you have gave it few years of your life you still feel the same way, I am sure your arguments will have consistent qualitative and quantitative data.

      Until then I truly hope your fortune will not erode to nothing, it will be tragic to see you trying to fit into a world that you truly hate and cannot understand.

      The End

  2. The market bubble you refer to is not a bubble but a market supported by the above average incomes and wealth of people in an international city. Illustrate the average incomes and wealth of people who actually live in private London housing and you will have a correct analysis and a different conclusion.

    Using national income statistics to support the proposition of a housing price bubble in London is like using the average income of people from the poorest nation on the planet to support the proposition of a housing price bubble in Blaenau Gwent which recently recorded the lowest average housing price of all 108 county and unitary authorities at £83,768 and a monthly reduction of 1.1%.

    Market exuberance will eventually lead to a fall in prices, as it does in any market, but that is not because the market was not supported by average incomes as it never was, but because market participants decided the real market fundamentals no longer supported prices being paid and better alternatives were available.

    The London market is further supported by an international market that merely wants a relatively safe depository for its wealth and is not too concerned if the market goes up or down as it is all relative in terms of UK property values and also many international property and other asset classes.

  3. Lincoln is unrealistic; although not for some and particularly with the new transport infrastructures planned, but at 32 miles distance Luton is currently recorded as being nearest to London with the lowest average property prices at £169,838. There are other areas within commuting distance of London with property prices affordable on average incomes.

  4. I apologise for any ambiguity in my earlier post. A property buyer in Kensington and Chelsea is not solely reliant on a large mortgage relative to the property’s cost to fund the purchase of a property currently estimated to cost 28.9 the average salary of those living in the borough.

    Using accumulated wealth Kensington and Chelsea property owners and buyers have decided that the benefits of living in the borough outweigh the premium paid over and above a mortgage afforded on normal loan to income ratios.

    An analysis of property values to mortgage ratios in Kensington and Chelsea would show that a mortgage is often taken out by choice, rather than by necessity, and interest costs paid by actual and not theoretical Kensington and Chelsea buyers, as a proportion of income and value, is less than for buyers in areas where income to value ratios are lower but interest costs as a proportion of income and value higher.

    1. Hello Chales, I have a few problems with your analysis, could you define what “hard work” entails there are a lot of people who work very hard and are well educated and yet do not get paid much for that hard work. Is that because they do not fit your definition of “high achievers”. In that case without resorting to tautology, what do Mr and Mrs Average need to do to become high achievers.
      Going back to the original article it does not seem to me that pointing out that a bubble is occurring means that someone is asking for socialism. Do you mean that bubbles do not exist, or is it that bubbles are just markets working normally and so can be ignored until the inevitable market correction, or crash, to use a more usual term.

    2. Chales
      Reading your posts ive formed the conclusion your an ignorant and air headed fool.
      Literally your posting on things your ignorant of.
      I run a London developer so let me correct you, as of all the people on here probably one one of the few, writer of this whole article included who knows what they’re on about.

      1 the London property soufflé is supported by the heat of overseas purchase. Half of all new homes are going abroad at the moment then rented back.
      They’re not supported by the income of London and uk residents, rent to earnings ratios are at a history making first time in world history high. Not a ten year high,a first time in history high.

      2 knc sales are not about mortgages mot accumulated wealth. They’re Russian and Chinese investing and often leaving empty,

      Fact London rental and house prices are killing real London. Nothing can be done by pure market economies while Russian and chinese Money flows in.
      It IS a bubble but one that is long term secure and that is self sustaining.

  5. I would dispute some of those figures, when I was looking to buy property in east London a few months ago (and spend several hundred hours looking at it) house price inflation was in the region of 100%. Houses that were sold 12 months previously (and had not been improved/renovated – you can see archive sale photos from previous sales) were up 100%, with 15 month periods between sales it was 125%. Houses on the market for circa £350k (which were at historic unprecedented highs for the area/road) were selling for more than 50k over asking price within weeks of being listed. The market is absolutely insane.

  6. a few additional observations:

    1. stamp duty rates deter people from selling, so leading to lack of supply. current turnover of existing stock is woefully low.
    2. subsidies to buy to let landlords who can offset mortgage interest etc against rental income is ridiculous. get rid of these subsidies and more supply will come online
    3. artificially low interest rates are fueling the expectation that rates will stay this low for a very long time. BofE are the cause of this.
    4. unregulated and largely un-knowledgeable estate agents bidding up the price of property on the basis of earning higher commissions; capitalizing on the obvious desperation from a number of purchasers; and plenty of buyers not doing their basic research. regulate estate agents and make them pass the RICS exams. that will weed out the dire tactics on display.
    5. desperation from 1st time buyers to get on the ladder as the media stoke up the expectation that prices will continue to increase. this is leading to a ponzi scheme type effect, where eventually this will cause prices to fall when rates rise
    6. combination of interest rate increases (big effect on 250k -1.5m price bracket) and possible change in govt next year (lab/lib coalition, mansion taxes etc, will have large effect on upper end prices). if both happen at the same time it could get interesting at both ends of the market.

    the number of times people tell me that interest rates will never again get to the levels of the 90’s tells its own tale. at some point the market will fall, which will have a big consequential effect on the banking sector.

    of course, i could be completely wrong and insane rising prices will last forever..

  7. A really good analysis: so good to have a set of increasingly-well-tailored ratios shedding light on the (rightly) emotive issue of the moment.

    However, I’ve got one more putative data-set to add to the mix – one that probably reverses your conclusion.

    That data-set is the *number of people with high incomes / wealth, in emerging markets specifically*. That number is exploding. Seriously. The graphical intuition behind that assertion is that, if the income distribution (not-quite-bell) curve in a developing country is moving right every year, to reflect, say, 3% real growth in per-capita incomes, then the number of people earning more than, say, $1m a year, will be growing at something a lot faster: at least 20% a year, I’d say – because the curve is so dramatically downward-sloping at that point.

    This means that, as emerging markets grow, they’ll throw out an exploding number of millionaires – a trend that’s not going to slow in the foreseeable future. If those millionaires are liable to desire a London pad with 10% probability, say (for social / children’s-educational / ex-colonial reasons), then you can see how there’s going to be an *ever-growing* demand for London homes by the wealthy from India / China / Russia / Nigeria / wherever. If you’ve lived in central London a while, what you see will bear this out.

    And as long as there’s a growing number of the super-rich from abroad (incidentally, they’re not captured in the income denominators in your graphs 4 and 5) buying in London, the city will sustain higher prices than other parts of the UK, even after adjusting for local incomes.

    So – there’s a good chance that price levels in London aren’t going to fall and rather, keep going.

  8. Thanks for the thought-provoking article and the statistics.

    We are what you may call the ‘evil’ foreign landlords, owning multiple properties in London. For a global city of her size and economic importance, London is surely not building enough homes.

    Isn’t it because of the chronic under-supply that prices have gone through the roof?

    Also, it appears that the credit market in the UK is still very tight. The banks are not really lending much and the downpayment required is fairly hefty. Yet the prices are sky-rocketing.

Leave a Reply