London at risk of property price bubble, warns UBS
31 October 2015
With the sharp rise in housing prices in London, a "bubble-risk" had left the capital most in danger of a correction out of all major cities in the world, Swiss bank UBS warned.
According to the Swiss bank, foreign demand from investors seeking safe-havens, the government's help to buy scheme and "alluring yields" on buy-to-let investments had all "propelled London house prices to new heights" as demand continued to outstrip supply.
"London is by far the most overvalued market in Europe, at risk of a bubble as a result of explosive price behavior since 2013."
According to UBS "caution" was warranted as London now risked a ''substantial price correction should the fundamentals for estate investment deteriorate".
"London is by far the most overvalued market in Europe, at risk of a bubble as a result of explosive price behavior since 2013," the report warned.
UBS's real estate bubble index showed London property was now the second-most unaffordable of the 15 cities studied by UBS, behind only Hong Kong.
"Price-to-income and price-to-rent values have surged to all-time highs even as real earnings have fallen 7pc in London since 2007," UBS said.
Commentator Dominic Frisby said in moneyweek.com, though enough homes were not being built, those that were being built were undesirable and planning laws posed a huge barrier to progress, the primary cause of unaffordable housing – and all the inequality that high house prices had created was loose monetary policy - ''easy credit in the 2000s, then, post-2008, quantitative easing (QE), zero interest rate policies (Zirp) and all the rest of it.''
He writes that monetary policy had caused the housing crisis and the sooner this was accepted by the powers that be and action initiated on this link between monetary policies and unaffordable housing, the better for all concerned.
Houses currently stood at 15 times earnings as against 3.5 which was the norm. A skilled service-sector worker needed approximately 14 years of average earnings to buy a flat of 645 sq ft.
Speaking of rents, the ratios were so distorted, the cost of buying a flat was equivalent to renting it for 30 years.
In May, it had been projected the UK housing market was expected to heat up again after the victory of the Conservative Party. The top end of the market was then likely to fire up the most, fuelled by overseas investment. (See: Cameron victory a huge boost to UK property market).