UK house Jul15London house prices are one of the major faultlines in the debt-fuelled Ring of Fire created by central banks stimulus policies:

  • It is crazy to have created a situation where potential buyers are asked to pay hundreds of thousands of pounds to buy even very basic apartments in unfashionable area
  • It is complete madness that developers are now building 54000 supposedly luxury homes in central London that will sell for at least £1 million ($1.56m)
  • As I discussed earlier this year, these developments cannot possibly work, as only 3900 homes were sold in this price bracket in 2014

The Greater London region is also quite out of line with the rest of England, as the chart above shows – presented by Merryn Somerset Webb at this year’s MoneyWeek conference. Everywhere else apart from Brighton (effectively now a London suburb), has seen prices either fall or remain stable in inflation-adjusted terms.  Prices in the northern half of the country are down by 20% or more.

And now it seems the bubble is starting to burst.  London’s biggest development – on the River Thames at Nine Elms – is reportedly now seeing a wave of “flat-flipping” as investors try to sell unbuilt properties before the crash comes.   Nine Elms has 20k units under construction, which have attracted speculative buyers eager to take a financial position rather than buy a property.  As one agent told the Financial Times, it had become:

‘Singapore-on-Thames’. Buying off-plan was the ultimate option play for a lot of the buyers [who are] Asian.  You only need to put down 10% and then see how the market goes.  A lot of buyers are effectively taking a financial position rather than buying a property”

And another commented that:

“The Nine Elms area is particularly prone to speculative buyers: It’s a dog-basket of developers all whacking stuff up, all jam-packed against each other, and walking out of the door and trying to find a pint of milk is really hard. Looking at what’s coming out of the ground, I wouldn’t want to live there and not many people we talk to want to buy down there.

“Investing for capital appreciation rather than yield is gambling.  If you can find some other patsy then my advice would be absolutely to sell. As long as the music keeps on playing, everyone is happy, but at some point the music stops.”

This mirrors the famous pre-Crisis comment of Chuck Prince, then CEO of Citi, who dismissed worries in 2007 about sub-prime lending by saying:

“We see a lot of people on the Street who are scared.  We are not scared. We are not panicked. We are not rattled. Our team has been through this before.  We are “still dancing“”

History, as American author Mark Twain noted, may not exactly repeat but it does rhyme.  Anyone who still thinks London property might still be worth buying has been warned.