If you look at the UK property market you will see that income multiples for mortgages have increased from anywhere between three and four just 20 years ago up to seven, eight and sometimes double digits. It is therefore surprising that when income multiples on houses in the lower to middle price brackets begin to get stretched, everybody believes the whole market will fall back. So, why are top end house prices disconnected from income multiples in reality?
Property portfolios
The vast majority of people acquiring properties worth in excess of £10 million are likely to have more than one property and significant wealth behind them. They are not buying these properties on multiples of their current income, or even their future income, the vast majority already have sufficient financial wealth to buy these properties out right if they wanted to. Whether it is for cash flow purposes, offsetting interest payments against tax or other financial dealings, very often it does make financial sense to use mortgage facilities as opposed to paying up in cash.
Buy to let
As bizarre as it may sound, over the years London homes valued towards the higher end of the price bracket have on occasion attracted rental yields which were less than short-term gilt yields. Indeed on one occasion over the last decade we saw the rental yield on a luxury property in London fall below 2% which seems absolutely crazy. Every property market has a rental ceiling and tenants will look at local rental yields and work out what they should be paying. So if somebody is willing to pay over the odds to acquire a property the rental yield can often become a redundant valuation method.
In many ways it is the much sought after properties which attract the lowest rental yield because this is where scarcity value comes into play. These properties may not come up again for another decade or longer and therefore there is often competition and buyers “willing to pay over the odds”. So, while income multiples bear little or no resemblance of the London property market, and other luxury property markets, the same can be said of rental yields.
Many properties are vacant
Surprising as it may seem, when you bear in mind the UK and many other countries are in the midst of a housing crisis, there are many high-end properties which are bought for big-money (and big valuations) which can remain vacant for much of the year. Very often these are millionaires or billionaires who travel the world and will glide between their different properties across the globe. We know where the luxury property markets are, we know that they tend to hold their value in the longer term so even if these properties are vacant they can still be a good long-term investment.
Conclusion
We have said for many years now that the London housing market is disconnected to the rest of the UK and this is even more apparent when you move towards the higher end of the pricing bracket. Income multiples go out of the window, rental yields often mean nothing and for many investors it is simply the opportunity to buy much sought after properties which encourages them to pay over the odds.
Indeed, if you look at some of the millionaires and billionaires around the world they have properties right across the globe. They are still astute investors, who can see long-term value, but in the short term there is no real valuation tool. More than any other part of the housing market this is simply supply and demand and with supply often chronically short this can create excessive demand/competition.