One of the big stories we’ve been covering recently is the enormous disparity in prices and house price inflation between London and the rest of the country. Now, this gulf has always existed – there are obvious explanations for why property should cost more in a capital city, where jobs pay more and where there is less new property being built each year. However, the gap between London (particularly prime, eg posh, London) and the rest is greater than ever before – whether you look in terms of price or affordability. Much of this is being driven by foreign investors, who are buying up London homes as rental/investment properties. So much of a concern is the phenomenon that, as I revealed last week, the Chancellor is considering slapping capital gains tax on those overseas buyers (counterintuitively, they don’t pay it at present).
However, will this really make much difference? To understand why foreign investors are piling into London property, you need to step back for a moment and consider the economics. There is an awful lot of money being generated around the world – particularly in emerging markets such as China, India, Brazil and elsewhere. Thanks to global quantitative easing (from the Federal Reserve in particular), the amount of cash flowing around the international financial system is greater than ever before but there aren’t many investments that give you much of a return.
London property has stood out from an international perspective for two reasons. First, it offers a relatively decent return, with rental yields that are broadly speaking better than those in many other markets. Second, it remains very cheap in comparison to recent history.
This won’t seem immediately obvious when looking at the path of London property (in sterling terms) over the past decade. Here is the ONS’s mix-adjusted measure of London house prices since 2003:
However, while this startling chart shows you that (in terms of cold, hard sterling) house prices in London hardly fell all that much during the slump in 2008, and are now, on average, worth about £100,000 more than at the “peak” in late 2007, it doesn’t tell you the full story. As you can see from this graphic below of who’s buying new-build London properties from Savills, while UK buyers account for the majority of properties up to £700 per square foot, for anything above this, the majority of buyers are from overseas (to give you some perspective, the mews house I looked at in this video was going for over £3,000 per square foot; you’re unlikely to find much below £500/sq ft in central London).
Importantly, for these buyers, London house prices still look like quite a bargain. Why? Because although in sterling terms house prices are both high and rising, when denominated in their own local currencies, London property still looks cheap in comparison to 2007. Here is London house prices (the same ONS series) denominated in a variety of different currencies used by many of those buying newbuild properties.
(By the way the path for London property denominated in Hong Kong dollars looks very similar to the one above for the US dollar)
As you can see, in all of these currencies, London house prices are still significantly cheaper than they were in 2007. Bear in mind, too, that these are nominal prices – in other words, they don’t take into account the fact that over that period inflation will have eroded the real cost of any major investment. The bottom line is that for investors earning money in China, Singapore and in US dollars (which accounts for much of the emerging world – as well, of course, as the world’s biggest economy), UK property is still cheaper than before the crisis. In the case of China, London property is still 22% cheaper today than it was in 2007. In real terms that’s perhaps closer to 30-40%.
However, there are a couple of currencies in which UK property no longer looks so compelling. In euros, London property is now more expensive than it was before the crisis, as you can see from the chart below.
This is significant, given that when it comes to the most expensive London property, the biggest proportion of buyers come from Eastern Europe (see that Savills graphic above). Moreover, the Indian rupee has weakened very significantly in recent months, essentially making London property suddenly significantly more expensive for wealthy Indian billionaires (though in both cases many of their earnings are likely to be in dollars).