London home Feb15‘Nothing succeeds like excess’.  That seems to be the motto of London property developers at the moment.  According to researchers LonRes, developers are currently building or planning the staggering total of 54000 new luxury homes in central London.

These will all be offered at prices of £1m ($1.5m) and higher, according to the Financial Times.  Yet just 3900 homes were sold in this price bracket in central London in 2014.  So who is going to buy the vast supply of new homes?

It certainly isn’t Londoners.  I highlighted the record level of London house prices relative to average earnings last March. Then, first time buyers were paying 7.5x average earnings for an apartment, just topping the previous 2007 peak.  And relative to median earnings, London property was also at a record 10x multiple.

Instead of being sold locally, of course, the hope is that these developments can be sold “off-plan” to panic-stricken buyers in Asia, the Middle East, Russia, Latin America and continental Europe.  These have all heard that London is now a ‘global city’, and that it offers a safe home for their cash compared to their domestic market:

  • A year later, prices have risen even higher as a result
  • The first time buyer ratio is now an eye-popping 9x earnings across the whole of London, according to Nationwide
  • And average London prices have risen 12% over the same period
  • Yet government data shows the number of actual sales has fallen by over a third on a seasonally adjusted basis

One major concern is that nobody now remembers that London prices fell by a third in the 3 years between 1989-92, and by more than 40% in real terms (adjusted for inflation).  Most younger and foreign buyers instead believe that “London prices can never fall”.

But the problem, as Minsky would have reminded them, is that someone has to be able to repay the capital cost at some point.  And if the capital can’t be repaid, as is clearly the case in London today, the buyers will simply default.

The question is only one of timing.  Last year, I thought the bubble seemed capable of continuing to expand.  But today, with prices now so much higher, I fear the end is not too far away.

The combination of higher prices, falling sales, and increased supply usually means a market is close to collapse.  Plus, there is a real sign of desperation creeping into the estate agents’ literature.

Vauxhall is home to my beloved Surrey County Cricket Club.  And I can understand an agent describing it as “up-and-coming” – clearly this could be true of almost any area.

But those responsible for selling the St George’s Wharf development have taken hyperbole to a new level in describing it as “prime central London“.  This is the first time I have ever heard somewhere on the wrong side of the River Thames being described this way.

Anyone thinking of paying £2m – £4m for its 2-bedroomed apartments might first want to check its location on a map.

Maybe there are 54000 millionaires, or people who can borrow millions, already rushing to buy these new properties.  But more likely, growing awareness of this excess supply will prove the factor that brings the market back to its senses.