Content adapted from this Zerohedge.com article : Source
Historically, real estate is looked at as a hedge against inflation. Returns of 3% per year, an amount slightly ahead of inflation, is considered normal.
This is not the case in certain cities like New York, San Francisco, and Toyko.
One of the worst offenders is London.
Spurred on by insane escalation which priced most folk out of the market, a semi-detached home in this ciry went up 553% the past 22 years.
At last, the gala is ending.
The London real estate market is already seeing the early stages of a reversal. Homeowners are dropping their prices tens of thousands of pounds to get things moving. This situation could turn ugle very fast.
There are four main factors causing this drop.
1. Brexit is the most obvious factor frightening away potential buyers. Why would anyone purchase a property now in the capital when such an enormous and ominous question mark hangs in the sky? International investors keen to use London as a glamorous base from which to access European markets are understandably cautious — despite some misleadingly high profile 2017 Chinese investments into landmark London buildings — while the threat of a banker exodus is very real (property prices in Frankfurt are spiking as I type). According to the latest report by property data experts Molior London, sales of homes in the capital dropped by 20 percent in the last quarter of 2017. The report added some 15,000 recently completed luxury apartments remain unsold. For market watchers this is an amazing departure from the status quo, when London new builds were snapped up by global investors often before a brick had been laid.
2. The sustained low oil price is also very bad news for London property, chiefly because it means wealthy Arabs — traditionally big-time investors in the capital — are no longer so wealthy. Since Saudi Arabia went tonto on American shale producers in 2015, opening all the spigots to flood the market with cheap oil in an effort to drive them out of business, Gulf Arabs have had a lot fewer disposable petrodollars to put into Mayfair and Knightsbridge pied-a-terres. In fact, virtually all Gulf states are currently running heavy budget deficits, meaning there is significantly less cash washing about at the top of the London property market — bad news for property sellers down the ladder.
Dr Eckart Woertz, an expert in Gulf economies and senior researcher at the Barcelona Centre for International Affairs, explains: "The low oil price means there is less money to invest. In fact, most Gulf countries are now repatriating money. Look at Saudi Arabia — they have repatriated $200bn of their foreign reserves. The appetite to invest large-scale in London real estate by the big sovereign wealth funds and wealthy individuals is much reduced, which is unsurprising given the yields that are available."
He adds the recent Riyadh Ritz sheikhdown by Saudi Arabia's de facto ruler Mohammed bin Salman of 100 or so of the kingdom's richest men has sent a powerful message to other wealthy Saudis considering investing abroad. "They cannot do it as much now — they cannot wire big amounts. I know someone who has set up a real estate development in a European capital… he has Saudi clients who are telling him they cannot get more than ten million dollars out of the country. Wiring money now raises suspicion."
3. For those of us who would love to be worried about the difficulty of wiring ten million dollars,** the prospect of Jeremy Corbyn waiting in the wings to become Britain's next Prime Minister is a rather more relatable bad omen for London property values.** Corbyn, who at the time of writing was priced at 3–1 to be Britain's next leader, would head up a socialist government very different in outlook to the nakedly capitalist ones that have presided over the capital's property boom. Corbyn, for example, has openly advocated large-scale "requisitioning" of homes owned and left empty by wealthy investors in order to give them to the poor. "It cannot be acceptable that in London you have luxury buildings and luxury flats kept as land banking for the future while the homeless and poor look for somewhere to live," he has said. While undoubtedly a lovely sentiment, Jez, making state confiscation threats out loud isn't great for shifting houses to minted foreigners.
4. And then there's perhaps the most overlooked factor affecting the market: after years and years of being squeezed relentlessly, the indigenous London middle class, as it is in the wider UK, is largely skint. According to a recent survey by comparethemarket.com, a person in Britain is on average £8,000 in debt, not including mortgage repayments. Last June, the Bank of England announced UK unsecured consumer credit had gone over £200bn. It's not all skagheads in tenement blocks running up these debts. Research has repeatedly found that more than a third of people using credit cards on a monthly basis to make ends meet earn between £50k and £70k a year. In London, where living costs are highest, the pain is felt as keenly, if not moreso, as it is anywhere else in the country. With interest rates expected to start rising in earnest this year, that pain can be expected to intensify horribly.
Forget plateau or coolings. When it comes to the London property market, crash is the only word that applies.
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