Since the 2008 recession, which began in the US with the infamous mortgage crisis, many economies around the world have failed to regain lost ground and are still struggling to move into positive economic growth. The UK economy has flirted with negative growth over the last few months although at this moment in time it looks as though the worst is over and the UK economy is now at least forming a base from which it can grow in the future.
This comes at a time when the London property market, especially the luxury end of the London property market, begins to gather serious momentum. We are seeing multi-million pound property deals on a regular basis and unsolicited offers for prime property all at a time when the financial services industry seems to be moving ahead quicker than the rest of the UK economy. Is there a link between the London property sector and the financial services industry in the UK?
Employment in the financial services industry
While the Internet has brought about the opportunity to facilitate financial services outside of the London financial markets the fact is that London is still one of the major financial centres of the world. London has a very strong presence in stocks and shares, commodities, currencies and an array of other financial instruments which are now commonplace across the investment arena.
A report today by PricewaterhouseCoopers suggests that we could see an additional 133,000 jobs in the London financial sector over the next 6 or 7 years if the regulators take a positive stance in assisting the industry. This could actually lead to in excess of 250,000 new jobs in the UK overall spread across a whole array of sectors, led by the financial services industry. So, is there a link between employment in the financial services industry and the London property market?
Property prices in London
There is no doubt that property prices in London do tend to follow the financial services industry and the “unique” London economy as a whole. In difficult economic times the London economy is the first to suffer but once the economy gets back on an even keel London always leads the UK to higher ground. It will therefore come as no surprise to learn that as we see signs of renewed interest in the financial services employment sector we are starting to see the emergence of a very strong London property market.
Quote from PropertyForum.com : “As London echoes to the sound of ceremonial gun salutes, impromptu singing on the streets and the hustle and bustle of crowds outside Buckingham Palace, many people are asking where the new royal baby will live.”
Over the last few weeks we have seen a number of very expensive properties in the higher echelons of London’s luxury property sector change hands, many of them as a result of unsolicited offers from overseas investors. This would seem to suggest that while overseas investors continue their love affair with London, the strength of the London financial sector appears to be one of the major reasons for this ongoing dalliance. Even though overseas buyers are grabbing the headlines at the moment there is underlying support from UK investors looking for exposure to the London property sector.
Could the London property market overheat?
The speed at which the London property market reacts, on the upside and downside, is significantly greater than that of the rest of the UK. One reason for this is perhaps the lack of new property development across London which means that new investors looking for exposure to the area are bidding for a relatively small portfolio of prime properties. While it would only take a relatively small number of large investors to cause concern by pulling out of the market, or sitting on the sidelines for the moment, there is every chance that other international investors will join the party in the short term and possibly squeeze the London property market to new highs.
The reality is that while London property can be volatile during volatile economic times there is most certainly a strong core of support for the sector which will to some extent offer a safety net at lower levels. It is also worth noting that the value of the average UK property is very much skewed towards London and as this market moves towards record new territory this bias will become clearer.
The future of the London property market
Time and time again the European Union has attempted to wrestle control of the European financial sector from London only for successive UK governments to fight these moves. We have seen the introduction of new regulatory charges, we have seen more focus upon some of the more prominent European stock markets (such as Germany) but the reality is that London has a history and a presence which spreads right across the world and is renowned for its financial services industry. It will be a constant battle for the government to maintain this position at the top of the table but in many ways the long-term future of the London property market has become something of a pawn in this particular game.
The financial service industry in London not only pays out millions of pounds in bonuses and salaries but also brings in hundreds of millions of pounds in tax income and benefits for local businesses. It is no surprise to see the luxury end of the London property market moving towards new highs as the London financial services industry completes its initial phase of recovery and is now looking to grow again.
There is no doubt there is a significant link between the London property market and the London financial services industry, something which has been demonstrated time and time again. London is one of the leading financial centres of the world, involved in stocks and shares, commodities and currencies and its influence spreads to all corners of the globe. There is no doubt that this massive array of wealth which continues to pour into London has pushed the London property market to levels not seen since the 2008 recession and while on the surface it may look as though the sector is overheating in the short term, this is not necessarily the case.
We need to appreciate and analyse the London property market aside from the rest of the UK property market because they are very different animals. London is to all intents and purposes a mini economy within the wide UK economy and while there have been significant improvements in economic activity across the UK over the last 20 or 30 years, it is worth noting that the lion’s share of GDP and wealth is very much centred round a relatively small area of London.
For those who are looking to monitor the London property market you may find it useful to monitor not only the UK economy as a whole but also the London economy as a stand-alone unit and the London financial services industry. These two elements will most certainly give you an idea of the short to medium term direction of the London property market with particular focus upon the luxury end of the sector.