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London property prices have soared in recent years, but a new report suggests that the housing market in the capital may now be the most overvalued in the world and potentially in a bubble that could go pop at any time. Based on the existing property prices-incomes and house prices-rents ratios, which are both at all-time highs, the Swiss bank, UBS, said that the residential property market in London looks overheated, and points to the heightened risk of a “substantial” property price correction in the market should the fundamentals for residential property investment in the city deteriorate. “When inexpensive financing is combined with bullish expectations, real estate prices eventually uncouple from the real economy,” said UBS head of global real estate Claudio Saputelli. We have seen this in the current cycle, particularly in the world’s leading financial centers, where housing prices are now, in many cases, fundamentally unjustified. The risk of a real estate bubble in these cities has risen sharply. While it is not always possible to prove conclusively the existence of a bubble, it remains essential to identify the signs of one early on,” Saputelli added. UBS said that London’s housing market is now the world’s least affordable, bar Hong Kong, which UBS ranks as the second-most likely city to have a property price bubble, based on today’s record high home prices. “Foreign demand (for homes in London) and demand deriving from safe-haven seekers largely explain current valuations. Global geopolitical risk and the high property valuations in Asian cities have helped to propel London house prices to new heights,” UBS said. “Domestic buyers too have contributed to the appreciation.” Despite the warning from UBS that home prices in the capital look set to crash, many property professionals still believe that house prices in the city do still offer further room for growth moving forward. Looking ahead to what we can expect from the property market in 2016 and beyond, Stephanie McMahon, Strutt & Parker’s Head of Research, believes that home prices in London will continue to rise. In fact, her firm projects that property prices will increase across the country over the next few years. Strutt & Parker’s five year outlook sees the South East and the East of England, as well as Scotland offering the strongest growth, although Greater London will strengthen again throughout the time period, the company forecast. McMahon commented: “Other areas of interest include the South West. From our Housing Futures research we know that there is a huge aspiration to live there – our national survey showed that 15.6% of respondents who said they had plans to move within the next five years wanted to live in the South West, particularly for retirement and lifestyle reasons. “This trend is reinforced by the 2014 ONS data which pointed to the South West being the region with the highest homeworking rate in the UK, at 17.1%. That said, our Housing Futures survey also showed that taking into account all respondents, and analysing by age, that the South West was one of the areas that would experience a large exodus of people between the ages of 18-29, indicating that older cohorts have perhaps greater flexibility in their working styles. |
