As prices continue to rise sharply for properties across London, worries have been sparked about whether or not the market has become a bubble ready to burst.
These worries were stoked most strongly by the UBS Real Estate Bubble Index, a study that placed London at the top of a table of capital cities worldwide in terms of bubble risk. But these claims have recently been disputed by estate agents, so who ‘s right?
The online Investopedia defines an economic bubble as “an economic cycle characterized sic by rapid expansion followed by a contraction”. The London property market is certainly expanding rather rapidly (though parts of it, the prime section in particular, have slowed of late), but the question is whether or not we should be expecting a sharp contraction in the near future.
UBS are fairly firm is their characterisation, saying that “London is by far the most overvalued market in Europe, at risk of a bubble as a result of explosive price behaviour since 2013.”
Researchers at Lancaster University set out to look into these claims and search for signs of bubbles in regions across the UK. While they found no immediate cause for concern, their findings showed that if London property prices continue to go up at the rate they are, then the likelihood is that it will become a bubble by 2017. They further argued that if this does happen, then it is likely to have a knock-on effect on property markets throughout the rest of the UK.
The general consensus is that shortening supplies of growing demand are feeding into a vicious cycle in which owners are more reluctant to sell given the lack of properties for them to then buy.
The Bank of England confirmed this saying that “that imbalance between new instructions to sell and new buyer demand may also be putting upward pressure on prices: although average annual inflation in the Halifax and Nationwide house price indices has fallen slightly from its recent peak of around 10% last summer, it remained robust at around 6% in September.”
This slight slowdown though has been jumped upon by estate agents as a sign that maybe the London property market isn ‘t as much of a bubble as it is being made out to be, with Knight Frank researcher Tom Bill saying that “the air has been slowly coming out of the prime market for more than a year.”
Bill also questioned the likelihood of the kind of sharp contraction that characterises a bubble after growth. He said: “the bubble analogy suggests a rapid implosion, which is not the way we see it.”
Accordingly, Knight Frank ‘s forecast for growth in the London prime market for 2016 was lowered from 4.5% to 2%.
And they ‘re not alone in predicting a slowdown in price growth for London properties. Savills five-year forecast for London shows predictions for growth at 15.3%, compared to 17% for the whole of the UK. This slowdown of growth is not necessarily sharp enough to be considered a burst of a bubble, nor is the growth itself necessarily sharp enough to count as the expansion of a bubble, particularly given the comparison to the rest of the UK, where Lancaster researchers saw no cause for bubble-based concern.