Bank warns that London’s property market is world’s biggest housing bubble

A new report warns that London’s property market is at huge risk of being a bubble.

Based on past experience, the bubble is 95% likely to burst within three years and bring house prices down 30%.

Global financial group UBS says that London’s house prices are currently the most over-valued of any major city in the world.

It is one of only two cities – the other is Hong Kong – to be identified as a ‘bubble’ risk in the UBS Real Estate Bubble Report.

The report, which looks at house prices in 15 major cities, warns that London risks a “substantial” price correction and that house prices have decoupled from local income.

It says that London is less affordable for local people to buy than anywhere else, except Hong Kong.

London has the second highest price-to-income (PI), a calculation of the number of years a skilled service worker needs to work to be able to buy a 60 sq m flat near the city centre.

In London, it would take 14 years.

London’s PI has hit an all-time high and is only behind Hong Kong’s.

When cheap financing costs and “bullish expectations” are taken into account, there is a danger of the market decoupling from the whole economy.

London rates 1.88 on UBS’s bubble index.

According to the report, between 1985 and 2009, whenever the index exceeded 1, “a real price correction of an average 30% began within three years 95% of the time”.

In any case it expects London house prices to fall over 10% by the end of next year.

The report says that Sydney, Vancouver, San Francisco, Amsterdam, Geneva, Zurich, Paris, Frankfurt, Tokyo and Singapore are over-valued, while New York and Boston are fair-valued, and Chicago is under-valued.

UBS head of global real estate Claudio Saputelli said that in the world’s leading financial centres, housing prices are now “fundamentally unjustified”.

He said: “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.”

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8 Comments

  1. Typhoon

    AND THE WORLD IS COMING TO AN END -SO SAY SOME!

     

    Come on let’s not seek to create conditions to make it happen. London has slowed massively this year  and rightly so. It is/will self correct.

    Such dramatic commentary is scaremongering and for sure if enough people read it will have massive consequences on the confidence of buyers and so it could grind London to a halt. Not in the interests of anyone.

     

    And as we see and hear every day  forecasts and predictions of economic things to happen good or bad, are more often wrong than right, or at least wildly inaccurate

     

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  2. Property Paddy

    The London market will probably follow the Japanese economy and do nothing spectacular for 10 years. The house prices will deflate a bit and just stagnate until local incomes start to support the prices. Unless……… There is another bank crash or other global catastrophe

    , then all bets are off.

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    1. Jason McClean

      I am with you Property Paddy. It will stagnate for years with small drops at worst. People will stop selling and hold on to the property rather than lose money in negative equity. The bubble will deflate slowly rather than burst.

      Unless of course the media frenzy forces fear and panic selling.

      Jason McClean

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    2. smile please

      stagnate or stable?

      To be honest as an agent i would very much like to see a stable market for a sustained period. Prices have risen close to 15% in 12 months where we are based.

      Local economy cannot cope with it and as such property coming to the market is at an historic low.

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  3. wilko

    Until supply improves the prices will continue to increase or stabalise there just isn’t anywhere near enough property available in and around London.

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  4. Anonymous Coward

    I would LOVE a market where prices rose maybe 2-3% per year but the number of sales got back to something a bit more sensible.

    Outside London it is relatively (HA!) simple – build more property.

    In London is a different matter.

    The only real way is to get better transport infrastructure so that it only takes half an hour to get commuters in to the centre of London – instead of an hour plus.

    OR

    Build business hubs that aren’t in central London.

    Both have 30 year lead times.

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  5. Lance Trendall

    An average service worker in London is not the likely buyer for most London properties, they are probably forced to rent from local and overseas investors, who step in when locals can’t afford to buy, which is why corrections happen less since the web made the property market more global.

    If they re-ran their index taking an average City trader’s or banker’s salary they’d get a very different result.

    While the UK market remains such a safe long term investment, due to our short supply, stable political and economic environment, we’ll be seen as a safe haven for wealth from all over the world, so prices will continue to rise.

    In affluent areas, corrections can’t be more than 10%, because most buyers simply refuse to sell ‘at that price’, which reduces supply to balance any temporary drop in demand. So, a 30% drop can’t happen unless people are forced to sell, which won’t happen unless Jeremy gets in and upsets the apple-cart by making non UK residents sell their UK properties.

    Global demand is so vast we can never supply enough homes to stop prices rising.

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  6. Golf November

    Property Paddy has it one. Stagnation in London for a long while to come.

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