In an Australian publication, Sahil Mahtani of the Deutsche Bank sounds a warning note about London's property market.
Every £1 invested in London property in 1990 is now worth £5, double the performance of the FTSE 100.
Conservative estimates put average London house prices at 13 times average gross incomes.
London residential mortgage debt amounts to a quarter of the country’s total.
London’s housing market is huge, expensive, and hot. It’s not hard to find stories of property insanity in the capital and popular opinion holds that its a flood of foreign investors buying up homes and leaving them empty to accumulate value that has sparked the boom.
Mahtani says it’s simple supply and demand — the supply of homes has failed to keep pace with demand from buyers, be they foreign or otherwise.
But crucially Mahtani sees a second, overlooked factor for spiraling prices — buyers believe house prices will keep going up. People are willing to pay silly prices on the expectation prices will keep rising and they can cash in themselves later. That in turn bids up prices.
On the first point, he almost immediately contradicts himself:
He points to the Hong Kong property crash of 1997, when prices dropped 40% in just over a year, as evidence for what happens when the wind changes direction on public opinion.
Here’s Mahtani:
A shift in expectations about future supply was much more instrumental in bringing about the downturn. The post-handover government had made it known that it would welcome a decline in property prices and would increase supply by 85,000 units a year. In retrospect, at no point during the next five years did housing completions reach 35,000 annually. Yet because the decision had credibility, it changed expectations and the 85,000 figure is still cited today as a reason for the market decline. The government announcement precipitated a change in psychology that diminished the speculative increment in the market.
It didn’t matter that supply increased nowhere near as much as promised — the “psychology” had changed and that was enough to send buyers running.
In other words, the supply of housing did not change, but public perceptions did, which tends to suggest that the fall was all to do with psychology and nothing to do with supply and demand. Ricardo, in his Law of Rent, recognised that land prices are driven by public sentiment and there is ample historical evidence that this is so.
Whilst there is also evidence that supply and demand affect land prices locally, within London the "bubble" effect is so strong and demand is so ramped up by it, that there is simply not the physical space to increase supply enough to have any effect on price.
Those with large landholdings around the capital, hungry for for the windfall gains that change of use permission would bring, would like us to believe that the only way of controlling the price of land is to by controlling the supply. As Mr Mahtani points out, it much more effective to control the demand.
Debate Magazine
