London house prices: how demand has created its own supply

The supply of luxury properties in the capital has found its own ways of meeting demand, says Merryn Somerset Webb. That can only mean one thing for property prices.

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Prime London has expanded out to include Battersea

We have often noted here that demand has a habit of creating supply. Those looking for dramatic examples of this pretty basic rule of economics have been spoilt for choice recently (think commodities). But the London housing market is another excellent one to look at.

Since the financial crisis (and the initial 25%-odd devaluation of the pound it brought), prime London property has been considered a safe haven investment for foreigners operating in dodgy economies (from Italy and Greece to Russia).

The supply of suitable London flats was obviously limited in the short term. So prices shot up. But nothing lasts for ever and supply has been expanding fast in two ways.

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The first great supply leap has been to simply expand the definition of prime central London. It now includes Tottenham Court Road (the once miserable building that housed one of MoneyWeek's first offices is about to be turned into luxury flats), Battersea and Southwark.

The second has been to build more of the kinds of flats foreign investors appear to like: new ones with two bedrooms that cost in the region of £1m. This brings me to the latest report out from property agents Property Vision.

The new supply coming on, they say, is so huge that it is something of a "cuckoo in the nest" of the London housing market. How huge? Their research suggests that 54,000 units are in the pipeline.

Last year, under 4,000 properties sold for over £1m in prime London, something that gives you an idea of just how big (or small) the second-hand market is. It also gives you a hint of the scale of what is going on in London: "the sheer scale and monumentality of the towers that are rising daily is in a league of its own".

This might have nasty long-term effects on the skyline of London because the buildings are residential and communally owned they will, unlike offices, "be there forever*". That's a bad thing particularly given how little thought has gone into it. But there is a silver lining.

When supply rises to meet demand, prices fall. We had a poll on the blog last week in which we asked readers whether falling London house prices would be a good thing or a bad thing. The vast majority replied 'yes'. The number 54,000 might not be pleasing to those who disapprove of councils giving planning permission to anyone who asks in an effort to balance short-term budgets. But our guess is that, in the end, it'll please a good many of our voting readers.

* Good interactive guide here.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.