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Sunday, November 15, 2015

Why London house prices will crash

I love house price doomsayers.  For so many years they have got it wrong.  Despite regular attempts to predict the coming house price crash they are constantly proved wrong.  I would include myself in these doomsayers on house prices and surprisingly I and them are still right despite prices continuing to rise.

Why have house prices continue to rise

Nationally, lets not forget that house prices have been kept afloat artificially by monetary policy that has pushed the price of borrowing for many of us down to ridiculously low levels.  This has prompted more of us to hold mortgage debt for longer and greater amounts than we would have at normal rates.  Despite house prices being above historically high levels, people including myself continue to plough more money into property because of worries over the stock market and the low levels of returns available elsewhere.  The old adage of you can't go wrong by sticking your money in 'bricks and mortar' becomes a self for filling prophecy.  The more we get confused, scared, about financial and economic security; the more we get tempted to put our money into something we can see, we think we understand and we can use....housing.  No more has this been true than in London.

Why London house prices are about to crash

London has seen phenomenal growth in the value of it's housing stock.  Every pound invested in London Housing in 1990 would be worth £5, double the increase in the stock market.  Conservative estimates put London housing at 13 times average incomes.  London housing has become a sink and a refuge for the internationally mobile rich and this has inflated prices well past any sensible economic rational valuations ( does anybody remember the credit crunch cause by a housing and lending bubble).  Deutche Bank economist Sahil Mahtani argues that we have reached a tipping point where rising house prices in London have become a self for filling prophecy fueled nothing more than by a belief that price will rise inexorably totally detached from any economic fundamentals.  To read the full piece have a look at the Business Insider UK.  This is not the first time an economist has called the end of a housing boom.  Oxford economist Andrey Farley in his various publications for Oxford University between 2002 - 2005 forcast just such a scenario where house prices became out of kilter with economic realities and his predictions eventually proved correct in the credit crunch and house price falls of the last decade.

The reality that the timing and trigger of economic 'adjustments' or 'crashes' are uncertain and may take several years to materialize.  That doesn't make the doomsayers wrong.  Sometimes it just take time for these events to unfold.

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