Friday 30 October 2015

"London on course to become next house price bubble fatality, warns UBS"

From The Telegraph:

Soaring house prices in London have fuelled a "bubble-risk" that has left the capital most in danger of a correction out of all major cities in the world, UBS has warned.

The Swiss bank said foreign demand from investors seeking safe-havens, the Government's help to buy scheme and "alluring yields" on buy-to-let investments had all "propelled London house prices to new heights" as demand continued to outstrip supply.

It's a bit late for that, but actually, the report said that it was artificially low interest rates/easy credit  which pushed up prices, which is indisputably true.

Further, The Telegraph completely contradicts itself. If the yields on buy-to-let are "alluring" than that means they are high, or at least higher than mortgage rates. So for a given absolute rent, that means that selling prices are if anything on the low side relative to rents. Which they are not, so it's factually incorrect as well as flawed logic.

And 'lack of supply' has nothing to do with it:

Its real estate bubble index shows London property is now the second-most unaffordable of the 15 cities studied by UBS, behind only Hong Kong.

The next most expensive places are of course Sydney, San Francisco, Vancouver, Amsterdam, Geneva, Zürich and Paris etc.

So we note as an aside that the most expensive five places are in the Anglosphere.

But we also note that most of the cities on the list are also the largest cities in each country or state*. By definition, those are the places with the most supply, so you can increase supply and people keep coming along and living in the new homes, hey presto, the new homes are now too off the market but the city is even larger.

What happens to prices then?

* Zürich and Geneva are the two largest Swiss towns, their populations are only 366,000 and 178,000 but Switzerland is attractive for other reasons. San Francisco is not that big (850,000), but it is just nice and exclusive, and Sydney and San Francisco also have a large premium for being near the coast - even in the UK where nowhere is that far from the coast, there is a massive premium for houses with a sea view.


Dinero said...

its more usual to call a bubble when yields are low - not high, if rents are alluring then that alludes to a different financial dynamic altogether, as that would require a "rent bubble".

Mark Wadsworth said...

Din, exactly.

Bayard said...

"there is a massive premium for houses with a sea view."

Wahay! according to that article, my neighbour has just increased the value of my house by 26% by pulling down a tatty barn that hid the sea from view.

Mark Wadsworth said...

B, yes of course he has. Is your house not nicer now that you can see the sea?

Mark Wadsworth said...

Bayard said...

Sadly, I'd have to go mad with a chainsaw on someone else's trees to get a sea view from any of the windows of my house, but I can see the sea from the entrance into my yard. To answer your question, it is good being able to see it even if I have to lurk in my own gateway to do it.