Well, will they? This is the multi-billion pound question – and the one being discussed at every property investment meetup I attend, whether in London or elsewhere.
I'll give you my opinion shortly – but first, we need a bit of context…
A tale of two markets
Newspapers talk about “UK house prices”, but that really isn't helpful – because London is a massive outlier that obscures what's going on in the rest of the country.
Take the East Midlands. Real house prices are at about three times real disposable income (according to the UK Housing Market Observatory), which is no higher than the trough in 2008.
The same is true for most UK regions outside the South East. As of last year, nearly half a million households were in negative equity.
You can criticise the statistics or the methodology, but you can see it in what's happening on the ground too. I'm still buying properties at way below their 2007 prices – in dynamic city centres, not remote Welsh villages or depressed parts of the North East.
Contrast this with London, where prices by both affordability measures and in real terms are higher than they were even at the peak of the last boom. This effect has rippled out to the suburbs, commuter belt and surrounding towns, pushing up prices across the whole of the South East region.
In short, it looks to me like the rest of the country is behaving pretty much as you'd expect given the general weakness of the economy. Low supply has pushed prices up in some (although far from all) places, but affordability remains reasonable because interest rates are so low (and will continue to be so for quite a while).
London has gone bonkers though, and is pulling the surrounding region along with it. Why?
Why has London gone nuts?
I'm no economist, but there are a few factors at play which will inevitably push prices up:
- After the crash and returns on other assets plummeted, London housing became a safe store of value for investors from all around the world. Investors bought up prime property (and in many cases left it empty), contributing to a ripple effect that pushed people who actually wanted to live in a property further out.
- London is one of the world's most important cities, and its growth is constrained by the green belt and other planning restrictions.
- I don't have the stats, but I'd bet that a good chunk of the new jobs that have been created since the recession have been in London.
- Because London is so comparatively wealthy, even when the mortgage market is constrained you get a high proportion of cash transactions.
So constrained supply along with immense domestic and international supply. Looked at like that, price spike is hardly a surprise.
Will there be a UK house price crash?
If you lump the whole of the UK together, maybe – because if London goes, there will be a “reverse ripple” that sees prices contracting across the whole of the South East. That will pull down the overall UK figures significantly.
But in the UK regions beyond the ripple-belt, I'd say no – not for a good number of years yet.
Why? Because prices by the standards of recent history aren't that high. A crash would require a whole lot more sellers in the market – and there's no indication that the supply of property is going to increase any time soon. It's true that an interest rate rise could trigger a wave of forced sales, but realistically that would be so bad for confidence that I don't see the government allowing it to happen.
Note that I said recent history. Real house prices rose by an average of 150% in the decade to 2007 and fell by an average of just 12% by the end of 2009, so you could argue that the real crash is yet to come. Again though, outside the South East I can't see that happening in a meaningful way.
Will there be a London house price crash?
Yes, according to UBS who describe it as one of the most overvalued cities in the world.
The evidence on the ground certainly suggests that the market is higher than makes sense for any participants. You don't need any statistics to be convinced that the average London resident has no chance of buying a property in Zones 1-3 without a significant parental helping hand.
And while rents are increasing, they won't rise enough to compensate for the rocketing capital values – meaning that investors are buying on gross yields of 3% or less. Even with record low interest rates they'll be making a negligible return, making it basically just speculation on further growth.
Is there any credible argument then that there won't be a crash in London?
Well, it depends: is London overvalued because we're in bubble territory and speculators are pushing it ever higher…or are prices just high because of off-the-charts demand and limited supply? And if the latter, is that going to change any time soon?
It's a bit of both, but I think the “bubble” component is smaller than people might assume. Everyone knows that London prices are ridiculous – and while there will be some people deluded into thinking that prices can only go one way, I think a lot of the current buyers are people who need to live there or are happy to make minimal investment returns because of the perceived safety and long-term demand. That said, there is significant downside risk from prices being so far decoupled from historic affordability measures.
What I claim to think on a blog isn't worth much. Instead, look at what I'm actually doing.
Would I buy in London right now? Absolutely not. Even if I believed that prices are just going to go up forever (which I don't), they're already at such a level that an investment doesn't make sense. Stress-test at higher interest rates, and there's no way of making a respectable monthly return.
But am I selling what I already hold in London? No…I think about it a lot, but can't bring myself to do it.
I think it's more than likely that some kind of economic shock could see prices retreat by 10-15%…but that would still only take us back to where we were a year ago. If I could see the potential for stellar gains elsewhere in the country I'd be tempted to sell, but I'm still getting a strong yield (based on my original purchase price) and have endless tenant demand.
So there, for what it's worth (clue: very little), is my opinion: no major crash, but a potential drop in the 15% range at worst and levelling out at best – which means that over the medium-term there will be limited growth and the rest of the UK will start to catch up.
However, what I'm basically saying is that this is a “new normal” – and when people start saying that, it's a good indicator that a crash is just around the corner. So please, make a note in your diary to come back and laugh at me in a couple of years' time.