Prime central London property bubble ‘bigger and still vulnerable’

As London’s prime residential property prices rise even further relative to the rest of the UK, a new report commissioned by Development Securities PLC and carried out by Fathom Consulting, today concludes that while economic drivers can partially explain this growing premium, a proportion remains difficult to explain – the core characteristics of an asset price ‘bubble’.

The report, Prime Central London: One year on, and even higher, uses a unique statistical model to identify the key economic drivers behind Prime Central London’s (PCL) price movements. These are materially different from those affecting house prices in the rest of the UK, and include: global equity prices; the relative value of sterling; and safe-haven flows. Over long periods of time, the model has accounted for 85% of the movement in PCL prices. The report finds that the price of a typical property in PCL is now more than 6.5 times the national average, and has risen by almost 20% since the time of our first report published last year. Moreover, PCL prices are more than 10% higher than Fathom’s economic model suggests they ought to be. PCL valuations now seem less sustainable and more vulnerable to correction.

The report identifies that the biggest threat to PCL property prices would be the failure of the US Federal Reserve to engineer a smooth exit from its Quantitative Easing programme. By tapering too soon and implementing a simultaneous tightening of both fiscal and monetary policy, the report identifies a risk that the US Federal Reserve sparks a fall in the price of assets, including PCL property. The report warns that a disorderly unwinding of the US QE programme could knock around 40% off global equity prices and about half of this amount off PCL property prices.

This is the second report in a series on Prime Central London property. The previous report, Prime Central London: In a Class of its own? was published in May 2012 and showed that global investors seeking a safe-haven, immune from the threat of the euro demise, had significantly boosted PCL prices. 

Michael Marx, Chief Executive of Development Securities PLC, said: "We remain convinced of the underlying attraction of Prime Central London property. As a place in which to live, Prime Central London is unique. But of course that does not make it immune from the laws of supply and demand. With the average Prime Central London property now a little under £1.5 million, valuations have never been more stretched. We are less confident now than we were back in May 2012 that Prime Central London prices are sustainable.”

Danny Gabay, Director of Fathom Consulting, said: “With the prospect of a euro break-up moved to the back burner, ‘tapering’ by the US Federal Reserve has come to the fore as the biggest threat to PCL prices. The gradual withdrawal of monetary stimulus by the world’s largest central banks risks removing one of the key supports to global asset prices, including PCL. In the event that tapering triggers a sharp fall in asset prices, the response of sterling will be key. If Bank of England Governor Carney can convince markets that a policy tightening in the UK remains a very distant prospect, sterling may fall against the US dollar, and against other currencies more generally. This would mitigate some of the downward pressure on PCL values.”