UBS talks down London real estate market

Financial giant UBS has issued a report suggesting that the London real estate market is most at risk from a price correction having created “the world’s largest house price bubble”. This is not the first time that the London property market has been the centre of attention with regards to valuations. The in-depth report highlights the most at risk property markets around the world taking in a number of factors. While the bare statistics may well suggest that London is significantly overbought, does this give the overall picture?

Has London decoupled from household incomes?

The headline statistics suggest that London house prices have increased by 6% in real terms from their 2007 peak while the UK market as a whole has fallen by 18%. Indeed while prices have moved ahead in real terms it seems as though average earnings have fallen by 7% over the same period. These figures alone do suggest that the relationship between household incomes and property valuations has “decoupled” but does this give the whole picture?

Foreign investors

The income to valuation relationship tends to cover domestic buyers rather than those acquiring London properties from overseas. In reality London is not a reflection of the overall UK property market and indeed is in many ways a stand-alone property market on its own. The vast majority of those who acquire property in London are already very wealthy with many able to self-finance property acquisitions.

There is no doubt that this has pushed London property prices above and beyond traditional comfort zones especially when you add in domestic demand as well. As we all know, the UK government has brought in a number of financial incentives to assist those looking to climb aboard the property ladder and the Help to Buy scheme has stoked the fires beneath the London property market. In many ways the UK authorities are in a difficult position, if they sit back and offer no financial incentives to first-time buyers they are criticised, yet if they offer financial assistance they are accused of stoking a potential property price bubble.

What does the future hold for London property prices?

While UBS is adamant that the figures indicate the creation of a property price bubble around the London property market they are not able to predict when the “expected correction” will occur. Historically the UBS measure has indicated a price correction of 30% within three years for a market which exceeds a score of 1.0. The London market came first in the list with a score of 1.88 with second-placed Hong Kong well back at 1.67.

This is not the first time that the London property market has been criticised for “exceeding traditional valuation measures” and this is unlikely to be the last time. If you take into account the number of wealthy individuals attracted to London, the UK economic situation and also the perceived “safe haven” status, it is not difficult to see why London property prices are valued so highly. Whether we will see a short to medium term correction in prices remains to be seen but more often than not investors tend to ignore overly critical reports.

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