Why it’s time to ignore predictions of a Brexit-led collapse
Property in London has stalled in recent months. After a colossal period of price growth since the end of the Global Financial Crisis (GFC), house price inflation has stagnated. In some areas of London, property prices have gone into reverse. The reason given by property experts for this reversal of fortunes has consistently been cited as ‘Brexit woes’.
In this article, you’ll learn why we think London house prices are near to bottoming out and could start to rise again soon – and certainly before the Brexit negotiations are concluded by April 2019.
Are London house prices a bubble that is bursting?
Financial bubbles creep up on you. It’s hard to recognise them as they are inflating. People don’t want to accept that prices can reverse. Experts are terrified of spooking markets, and admitting to their clients that they were wrong.
Very few people predicted the Wall Street Crash of 1929. About as many foresaw the 1987 stock market crash, fewer still the dotcom bubble. And virtually nobody saw the GFC coming, which would decimate all asset prices.
To assess whether London prices are in a bubble, we must understand what a bubble is. In a nutshell, an asset price bubble is caused when a frenzy of buying pushes prices to a level that cannot be explained by logical explanation.
Consider the dotcom bubble. Investors were in a feeding frenzy for any company involved in technology. It didn’t matter that these companies made no money – they would be in the future, investors were told. And so, shares were bought like they were going out of fashion. Logic defied this.
A common ratio used by investors to value stocks is the Price-to-Earnings ratio (P/E). Usually, this lies somewhere between 12 and 20. It means that if the company paid out all its profits to their investors, it would take investors between 12 and 20 years to recoup all their investment. At the height of the dotcom bubble, some companies had P/E ratios of 800 and more. If you had invested in Yahoo! In early 2000, its earnings wouldn’t have covered your investment until you were more than 800 years old!
So, are London house prices in a bubble? They are high, that’s for sure. But they have risen because demand for property is higher than supply. That looks likely to continue. London’s population is set to grow by around 2.5 million, to more than 10.8 million by 2041. It should pump up demand for homes – and this is a demand which developers of property in London can’t meet.
If London property prices aren’t in a bubble, why are they falling?
There are two main reasons why London property prices have fallen over the last few months. The first is that in some prime London locations, demand doesn’t warrant the extreme house prices. These are places where investors, including those from overseas, have bought simply for capital gain (not to rent out, and receive income)– just like those investors in the dotcom industry. The increase in stamp duty rates made prime central London property suddenly look very high and unattractive. Classic bubble territory.
But across most areas of London, property and economic fundamentals are supportive of current prices. For example:
- There are massive regeneration and investment
- Land for building is in short supply
- Population growth as outlined above
So why are London property prices falling? They’ve been talked into it. People have listened to the experts’ dire predictions of an economic crash and a backlash from London’s financial firms. PwC predicted that London would lose between 70,000 and 100,000 high-paying jobs in the financial services industry. Home buyers and investors have run scared. But the reality is proving to be markedly different. Here are examples of what the big banks said then, versus what they say now:
|Firm||Pre-Brexit Job Loss Estimate||Latest Job Loss Forecast|
|JP Morgan||4,000||500 to 1,000|
|UBS||1,500||maximum of 1,000|
|Goldman Sachs||1,000||a few hundred|
|Morgan Stanley||1,000||could be as many as 300|
- Barclays have announced they will move their Euro HQ to Dublin, creating 150 jobs in Ireland – but with no job losses in London.
- Citigroup has announced they will move a maximum of 100 trading jobs from London to Europe.
- Nomura will move fewer than 100 jobs.
- RBS may relocate ‘tens of jobs’.
- SocGen has recently bought Kleinwort Benson, and plan to open new offices in Canary Wharf in 2019.
- Deutsche Bank has just signed a 25-year lease on a new development at 21 Moorfields.
- Crédit Agricole has just signed a six-year extension on its London City HQ.
In fact, that doom-laden prediction of as many as 100,000 London job losses and decimation of London’s status as a global financial centre are proving to be among the worst of the scaremongering tactics used in the lead-up to the EU referendum. Current predictions for London financial sector job losses range between 3,000 and 6,000.
Is it time to consider investing in property in London?
My feeling is that the current lull in London property prices will be seen as a golden opportunity missed by some investors in years to come. It’s becoming clear that Brexit is not going to have the disastrous consequences predicted by so many experts.
Listen to those same experts even now, and they will discuss Brexit as the main reason for London’s house price slowdown. Those same experts also forecast that the failure to accept the Euro as the national currency would lead to the collapse of London as a global financial power. They were wrong then, and look set to be wrong again.
While I’m not predicting a massive bounce in London property prices or a rapid return to the fast-rising market we witnessed between 2010 and 2016, I don’t expect a crash either. The property fundamentals are way too strong. House price rises might be subdued for a couple of years, but when the market wakes up to the better-than-expected post-Brexit London economy, they will resume their upward momentum. If you aren’t aboard by then, you may find you missed the boat of property investment opportunity.
Live with passion,