What Sir Isaac Newton can teach us about London’s ludicrous property price bubble

When even the kings of overpriced property, the Candy brothers, start getting worried about London property prices, might it be time for the rest of us to worry too?

A report in today’s Times quotes Nick Candy as saying that “in Mayfair alone there are seven major schemes being developed with over 200 apartments with an average sale price of more than £20 million.”

He isn’t alone in beginning to worry that this so far ludicrously lucrative market might have begun to eat itself. Savills put out a report recently suggesting that “the pipeline of prime schemes across London is entering uncharted territory”.

Then there are the many people quoted in the Sunday Times this week on the same subject. There’s David Austin of Capital A (a financing firm back by the Pears family). He has a “feeling that these flats will be like new cars: buy one and in two years it could depreciate by 20%”. Then there is Michael Marx, head of property firm Development Securities. “By definition”, he says, the price rises of the last few years “cannot continue”.

And there are already signs that the end might be in sight. An estate agent in north London reports that, thanks to the rise in stamp duty and concerns about a mansion tax, “the market for homes over £2m is flatlining, if not in full blown recession”. I really want that to be the case.

Betting against property in most of the UK over the last five years has been a clever thing to do. Betting against it in London really hasn’t been. We all know it isn’t quite right. We all know that a 20-year cycle of falling interest rates has to come to an end at some point, and we know that could be the trigger for some kind of change. But when prices keep rising and rising, it’s hard to be confident.

However, from now on, every time I start thinking to myself that prices might actually go up for ever and I should just get on with it and buy a London flat, I am going to look at this chart in Tim Price’s newsletter:

Isaac Newton and the South Sea Bubble

It shows what happened to poor Isaac Newton in the South Sea bubble. He bought in early and sold out when things look ridiculously expensive (the equivalent of London house owners who sold in 2007 perhaps?). Then, as prices rose and rose and rose he lost confidence in his judgement and bought back in. That was fine for a very short period. Then came the crash. Prices fell back way below the level at which he had bought. Then the level at which he had first sold. And then the level at which he had first bought.

The price of a London house is never going to behave quite like that but it’s still worth printing the chart out and sticking it on your wall for those moments when you have a sudden attack of London price FOMO (fear of missing out).

The final word goes to Marx who says this:  “I’m an experienced jungle watcher, and there’s something going on in the jungle.”

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40 Responses

  1. 09/12/2013, Boris MacDonut wrote

    Hmm. The South Sea Bubble came about as a gamble during wartime. The British speculated that the Spanish Empire was crumbling more quickly than in reality and that the newly formed UK could exploit trade in Latin America to fund it’s wars with France.
    The whole enterprise was corrupt to its core. How apposite that the main private Bank involved was called Hoares.
    As such it was the first real specualtive bubble of the modern era after the founding of the BoE and those swept up in ity can be forgiven for their naivety.
    The London property market is at least based on visible solid existing assets and a safe legal system to protect the owners rights.

    • 11/12/2013, robin wrote

      Amazing to think that Sir Isaac Newton was the Master of the Mint for many years. This position surely is the equivalent as the governor of the BoE at the time? And he was no wiser as to stock market bubbles at the time than anyone.

  2. 10/12/2013, Top Hat wrote

    This is digging into the barrel now. Londons market is a matter of supply and demand and there’s far more demand than there is supply. In prime areas the agents are achieving over 100% of asking price as sealed bids are now the norm. London is turning not into a bubble but a separate economy from the rest of the UK. I gave up with owning a flat in London a while back.

    • 10/12/2013, Ellen12 wrote

      There is no logic to whats going on in London right now. I think there is wild panic and fear of never being able to buy any kind of squalid home – but its impacting very badly on the standard of living and quality of life of normal working people. We must have reached the stage where checking out of London is the only sensible option for anyone who is not an owner occupier and is living, not through property speculation, but by earning their living. Sure, enjoy London, if you can afford it, for a few years, but start your family somewhere else.

    • 11/12/2013, gamesinvestor wrote

      Supply and demand is one thing but ultimately affordability is the determining factor. There is no shortage of demand and never has been in Japan for 24 years but that has not stopped prime Tokyo property falling by 75% and staying there pretty much for most of that time.
      There are books about spectacular delusions – this is a prime example of one of them. No one can say when it will end but the fall out could be very severe indeed when interest rates ultimately climb 2-3 or 4 fold from where they are today. And they will — “like night follows day”

    • 11/12/2013, robin wrote

      Lets assume that all of this is driven by foreign buyers demanding someplace to stash their cash.

      In any other world, the buyer would at some point associate what they are actually getting with what they are paying. The only reason this is working is probably because the buyers haven’t actually seen the properties. They have probably been invited to a weekend ra-ra session hosted by the developers where their demand in baked up to a fever pitch. Think Anthony Robbins with an estate agent angle.

  3. 10/12/2013, Rob C wrote

    MW and Merryn have commented endlessly about the bull market in property having been created by the cheap supply of money rather than supply and demand. That said, London has seen a lot of foreign money flow in (with no need of a mortgage) looking for a relatively safe haven. UK law and history makes this a very safe haven. The imposition of CGT on foreign owners may slow things down a little but that is no bad thing. However, the situation will only truly unravel when interest rates revert to normal – e.g. above inflation. You won’t want to be Governor of the BofE or Chancellor of the Exchequer or currently getting by on an interest only mortgage when that happens.

  4. 10/12/2013, Rajah Brookes wrote

    The irony is that London is now falling foul of the same problem it has brought to the southwest. I live in Devon and second home owners have killed whole towns and villages down here. Salcombe is a particularly fine example of a place that is lovely to live in for about 2 months in summer but is a ghost town the rest of the year. Summer population 18,000, winter population 1700. A smattering of people that make a living acting as caretakers and cleaners of empty houses. No-one local can afford to live there. Consequently the schools and shops close. The town dies. Think it can’t happen in London? Look at the rate that young professionals and families are leaving the capital. Attracting in big money is a great idea in moderation but it can’t become the only economic game plan! That way disaster lies.

    • 10/12/2013, Boris MacDonut wrote

      Rajah, I like the idea of the Salcombisation of London. Imagine 11pm on a November evening and only one light in ten is on. I think it could lend the Great Wen an allure it currently lacks.
      The London market is thriving. When dear old Michael Winner passed away the press were keen to say he wasa broke….until Robbie Williams paid £17,200,000 for his Holland Park des res.

      • 11/12/2013, NeutronWarp9 wrote

        Ah, Robbie Williams. The epitome of sanity. No offence Boris, just in case you are related.

      • 15/12/2013, Tyler Durden wrote

        “The London market is thriving. When dear old Michael Winner passed away the press were keen to say he wasa broke….until Robbie Williams paid £17,200,000 for his Holland Park des res.”

        That scenario would commonly be called a ‘ponzi scheme’ Boris. There is no productivity there, the house hasn’t improved, become more energy efficient or brought the cost of living there down.

        • 15/12/2013, Boris MacDonut wrote

          I agree there are elements of a Ponzi in the endless enrichment of a few. But surely the value is the land/location and not Michaels pile per se.

    • 11/12/2013, Nick Name wrote

      Probably not so much like Salcombe as it’s seasonal, more like a big version of one of those gated communities in the US reserved for rich people with the right background.

      If you ran a business where you didn’t need customers to visit your premises why would you put it in London? You can easily be based an hour outside it, have half the costs and still service it’s rich residents.

      I already know builders based on the south coast who get most of their business in London because they can undercut the local tradesmen and still make a fat profit. Inertia is a powerful thing but as people cotton on I can see a fairly major exodus taking place.

  5. 10/12/2013, Andrew M wrote

    There’s some frothy bubbleness at the top of the market, in Mayfair and other parts of “prime central” London. However in zone 2 and beyond, prices are securely underpinned by high and rising rents. Those rising rents in turn are supported by the continued exodus of southern and eastern European workers (economic refugees) into London. Further factors include rising train fares from the home counties (£5,000 a year out of post-tax income), pushing many people to relocate closer to their jobs. The London economy and jobs market is generally doing well too.

    The comparison with the south sea bubble is just ridiculous. Our politicians have a vested interest in keeping the property bubble alive, both through their own holdings and through their voters’ interests (tenants are a lot less likely to vote, especially if they come from foreign shores). The memories of John Major’s post-crash defeat are still alive in Westminster. We’ve seen time and time again that our elected leaders would rather crucify sterling than let nominal house prices slip.

    • 10/12/2013, 4caster wrote

      Two thirds of John Major’s house price crash took place between 1989 and 1992. He was re-elected in 1992, much to his own surprise. (I well remember the civil service unions had been taking selective strike action during the election campaign, and after his re-election it was obvious that his government had made no contingency plan to end the strikes, because they didn’t expect to be re-elected.)
      John Major was defeated in 1997, as house prices were starting to rise again.

  6. 10/12/2013, IanB wrote

    I wish the Moneyweek analysis were right, really I do. I remember going to one of their conferences three years ago and listening to a presentation on why London’s property market was about to collapse. Great advice, thanks guys…

    Meanwhile they’ve been consistently recommending gold (Mr Price had 80% of his wealth in gold, back when it was at $1700; now it’s down to $1250.

    The magazine is an entertaining read, truly it is, but the Moneyweek team is pretty clueless, nevertheless…

  7. 11/12/2013, ONLYBuyWhenThereIsBloodOnTheStreets wrote

    I recently saw a TV program with up to 20 people to view/buy some OVERPRICED sh*thole flat in London, SAME as 1989 we all know what happened next…sound familiar – bottom line… HUMAN Psychology NEVER changes NEVER!
    The CRASH will come…

    After the elections there will be BLOOD ON THE STREETS for sure, the crash will be like NO other! This UK crash will be like a HIROSHIMA BOMB going OFF! Smart folks will be buying when the dust settles NOT now during this MEGA BS government manipulation!

  8. 11/12/2013, Adviserman wrote

    Lots of good comment on both sides here, and I have 3 comments to add . . .

    1. when the average person ( income £25k or so ) can’t afford the average property (£165k or so), something has to give

    2. London is not a UK / property market any more, but an international “stash the cash somewhere safe ” haven, and fiddling with Tax rates may not change that

    3. the supply : demand imbalance will have an upward effect on average prices overall, but local factors may override them from time to time

    4. take a look at Tokyo property prices , say, from 1989 to now . . . . .

    I won’t be expanding my BtL portfolio yet, but won’t be selling out either as I don’t want my assets in stock / bond markets.

    5. In some ways, it’s a shame our political horizon is only 5 years !

  9. 11/12/2013, tuesday wrote

    Yes – and oddly attached to the notion of things crashing!

    I think they had a bit of success predicting a previous downturn and are desperate to repeat it. And a bit of success on Gold so are still selling it – as an ‘insurance’ (imagine an insurance policy which has had 30% wiped off its value!) – and now as ‘the greatest contrarian play since George Soros shorted the pound’ (as if doing just the opposite is a sign of great wisdom!)

    Their advice on property must have been pretty painful for anyone who took it – even just in terms of missed opportunity.

    I like the way Merryn moves to the moral argument (how awful it all is for first time buyers etc), then to the blame argument (these idiotic politicians) when the market does not perform as predicted!

  10. 11/12/2013, Merryn wrote

    @Tuesday. I put readers into gold in 2002 at around $250. Told you to cut back to insurance levels in 2011 at around $1680. Is that so bad? Really? And property. Wrong on London so far? Yes absolutely. But right elsewhere. Much of the UK has seen a real and nominal price crash – anyone who sold then and is buying now should be pretty happy.

    • 11/12/2013, Boris MacDonut wrote

      Always one for accuracy. Merryn,the lowest Gold price in 2002 was $278 on 4th Jan. It averaged $340 for the year. In 2011 it was below $1500 for most of the year and averaged $1490. Still a decent gain ,but try not to exagerate.

      • 15/12/2013, Tyler Durden wrote

        I’m not entirely sure what this ‘correction’ is supposed to be telling us.

    • 12/12/2013, tuesday wrote

      @Merryn. It is welcome and admirable you acknowledge the situation with regard to London but that really should be “London, the south East and other big chunks of the UK’ – including I imagine, the constituency of the majority of MW readers.
      And the claim with regard to Gold is disingenuous. For sure someone entering in 2002 would have down well but what of all those MW were urging to buy much much later – the comments section of every piece your colleague and MW’s gold expert Dominic Frisby are littered with complaints. Have you forgotten your pr pieces suggesting 2500, 5000 and beyond for gold?!

      The whole ‘Insurance’ thing is really quite pernicious. For a start that volte-face was sneaked out as Gold was into its decline and, given the huge love you had for it and MW’s claim to be ahead of the curve for its readers why not trumpet it in the way you did with the Euro: “Get out of this doomed currency now!”?

      But Insurance? Really? Against what? – Gold has become uncoupled from the dollar and stocks. It hasn’t acted as you predicted in relation to money printing. Hyper inflation has not come. And what insurance policy devalues by thirty percent? If it goes down to 900, is it still insurance?!

    • 13/12/2013, Tyler Durden wrote

      People who describe gold as ‘insurance’ don’t know the first thing about it.

      A house price crash? Have we seen vast waves of repossessions? Hardly. You haven’t seen anything yet.

  11. 11/12/2013, IJ1 wrote

    Regarding London property, TopHat and others who talk about supply and demand are ignoring reflexivity. Foreigners “invest” in London properties because the prices keep going up. That alone confers the “safe haven” status. Do you think they won’t sell when prices reverse? I think Merryn and Moneyweek will have the last laugh here (although the crash will be anything but funny). Those of you who blame Moneyweek for purchases (gold) or non-purchases (London property) that went wrong, stop! You have yourselves to blame. Blaming Moneyweek only reflects badly on you, as it suggests you can’t think for yourselves.

    • 12/12/2013, tuesday wrote

      Perhaps you do not understand the difference between blame and accountability?!
      MW sells itself as giving advice and regularly makes recommendations. Its pr material consistently trumpets past successes and makes great claims to gain new subscribers.

      You think it is OK to do that and just swiftly move on when those claims are proved wrong – whilst criticising bankers and politicians for their mistakes?

      Thankfully I haven’t; taken MW’s advice but the comments sections of certain contributors here tell a rather sorry story!

  12. 11/12/2013, Ellen12 wrote

    @ Tuesday, The BoE and UK government have been holding up property prices all over the UK for very many years and when a crash in property was imminent, virtually all of the resources of the country were thrown at keeping them on an every rising trajectory. This came in the form of ZIRP and QE which devoured peoples savings and devalued working peoples time. We live in a country where the people sustain the houses and not the other way round. This has nothing got to do with supply and demand. Neither supply or demand are happening organically. The return of slack and easy, un repayable, credit is fuelling demand – and not the prices people can genuinely afford to pay. Supply, up until now, has been heavily, and deliberately, restricted through measures like planning laws and land banking. We could not be further away from a free market economy as far as residential property is concerned. Of course the difference between now and pre 2008 is the exposure of this dangerous credit culture has been transferred from the banks to the taxpayer and individual borrowers. It really could not be more dishonest and bears no relationship to the economics of a free market economy.

    Your reference to gold looks, on the face of it, plausible but the murky world of derivatives are, I believe, the fly in the ointment for precious metals (and a good deal of commodities) and they greatly distorting the value of gold. That is my personal opinion, mainly because as governments continue to devalue labour through QE and easy credit, we will have currency collapse. Right now, people can’t buy houses. If the current economic policy of devaluation of our time persists, ( while our housing costs rise), we will need a different way to value our time just in order to survive. The politicians are literally crashing us into a brick wall and we will need to see value in any future median of exchange in order for it to work at all. And I think gold has a very big role to play in this.

    • 12/12/2013, tuesday wrote

      You make some very good points but this is an investment magazine. There are many many unsatisfactory ethical issues about the property market – just as there are about British American Tobacco, BAE systems and BP.

      MW themselves only seem to call on those ethical arguments to justify wrong calls

  13. 11/12/2013, Yeomanarchers wrote

    Ellen12 Has very clearly explained the situation in the UK. Sadly the goverment & the BOE operate only for themselves first, then the voter. While low paid workers move closer to slavery every day.

  14. 13/12/2013, older man wrote

    The joy of Moneyweek for me is the diversity of opinion it creates. Would it not be wonderful to see the investment performance of all who comment either for or against!

  15. 14/12/2013, Warun Boofit wrote

    The £ is not going to collapse on its own, the US$ Euro Yuan and Yen are all trying to collapse at the same time, if they all were to fall the relative exchange rates would remain roughly the same so nothing would change. There are equally compelling reasons why all these currencies should collapse and thats also probably the reason why non of them will other than the normal volatility so theres nothing to worry about. Interest rates will eventually rise sometime after the next election and some people will then be unable to pay their mortgage and that may cause house prices to drop but then rising interest rates will cause the £ to rise. I have read about the end of Britain, the end of the US $, that Chinas economy is really only worth half the official figure, that the Euro is finished, Abenomics in Japan, Gold will hit $10000 and the new reserve currency will be Bitcoin so all I can reasonably conclude is everythings going to be just fine.

  16. 14/12/2013, Greg wrote

    Yes, many countries wish to keep their currency weak, however too weak and then they’ll get imported inflation, and it might not need much for complete confidence to be lost in a currency due to debt and other things, and everything could go horribly wrong very quickly…

  17. 14/12/2013, triple7 wrote

    There are many unusual factors going on; yes, it’s about supply and demand, the cheap pound (so London is a good bet for foreigners looking for a safe home), the Bank of England with ultra low interest rates and politicians warping the market by interfering with help to buy. All these factors are blowing up a huge bubble that will explode once interest rates start to rise and loans will become difficult to finance. The only way to stop it from happening will be for continued money printing, inflation, the pound getting trashed and large inflation proof pay rises. What happened to Isaac Newton will happen again but could be delayed for quite some time with central banks colluding with one another to massage their currencies.

  18. 16/12/2013, ONLYBuyWhenThereIsBloodOnTheStreets wrote

    I couldn’t of put what you wrote Ellen better myself – TOP NOTCH…Ellen12!

    @ Tuesday, The BoE and UK government have been holding up property prices all over the UK for very many years and when a crash in property was imminent, virtually all of the resources of the country were thrown at keeping them on an every rising trajectory. This came in the form of ZIRP and QE which devoured peoples savings and devalued working peoples time. We live in a country where the people sustain the houses and not the other way round. This has nothing got to do with supply and demand. Neither supply or demand are happening organically. The return of slack and easy, un repayable, credit is fuelling demand – and not the prices people can genuinely afford to pay. Supply, up until now, has been heavily, and deliberately, restricted through measures like planning laws and land banking. We could not be further away from a free market economy as far as residential property is concerned. Of course the difference between now and pre 2008 is the exposure of this dangerous credit culture has been transferred from the banks to the taxpayer and individual borrowers. It really could not be more dishonest and bears no relationship to the economics of a free market economy.

    Your reference to gold looks, on the face of it, plausible but the murky world of derivatives are, I believe, the fly in the ointment for precious metals (and a good deal of commodities) and they greatly distorting the value of gold. That is my personal opinion, mainly because as governments continue to devalue labour through QE and easy credit, we will have currency collapse. Right now, people can’t buy houses. If the current economic policy of devaluation of our time persists, ( while our housing costs rise), we will need a different way to value our time just in order to survive. The politicians are literally crashing us into a brick wall and we will need to see value in any future median of exchange in order for it to work at all. And I think gold has a very big role to play in this.

  19. 17/12/2013, Ellen12 wrote

    Thank you for the compliment. As a parent, it is very depressing to see that the free market is being rigged against those who work for a living. If the government would keep out of housing, it would find its level. But Cameron, it seems, is fully invested in keeping housing out of reach the many and making ‘paying the mortgage’ the life’s work of those who manage to scrap onto this housing ladder. The older I get, the more it seems that the closer investors stick to the prime ministers agenda, the better they will do. Forget anything you learned in your economics class. But the few careers at the top of our political elite are economically very costly and socially and economically bankrupting an entire generation. It does all beg the questions ‘What are governments for?’ and ‘What are the consequences to them for making bad decisions or colluding with vested interests against the good of the wider economy?’.

    • 17/12/2013, Boris MacDonut wrote

      Wise words Ellen “Forget anything you learned in your economics calss”. In fact the luckiest are those who never learned any economics at all.It is a failed pseudo-science.

  20. 18/12/2013, Davros wrote

    Gold is cheap. Far cheaper in real terms than it has been for some time. Is it not time to buy? For me it is and I shall be buying soon.

    • 18/12/2013, Ellen12 wrote

      Well, today has been interesting for currency. On one hand we have the US trying to give the impression of tightening the money supply (token gesture). I think, the bitcoin story, (40% fall in a day), today is telling us another story on where China is on currency control. Are we finally turning a corner on currency protection or are the US and China flexing their muscles?

  21. 28/12/2013, ammaad wrote

    Lets see what happens when borrowing rates normalise….

    • 28/12/2013, Boris MacDonut wrote

      ammad. Given the average mortgage rate for the last 22 years has been 5.2% and it is currently just under 4% the “normalization” would mean the typical borrower paying an extra £120 a month.
      Awkward but not devastating .Sorry to disappoint.

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