The London property bubble’s days are numbered

London estate agent's window © Getty Images
We take high London prices for granted

It’s wrong to think of the UK property market as a single entity, as MoneyWeek editor-in-chief Merryn Somerset Webb has pointed out.

There are really two different markets. In most of the UK, house prices have yet to recover from the crash in nominal terms, and are still sharply down when you take inflation into account (in ‘real’ terms).

London by contrast, is in the grip of a property bubble, with the ratio of prices to average earnings at a record high.

The obvious trade – if you live in the capital – is to move. As Merryn points out, depending on where you start out and where you want to go, you can now swap a small London flat for a castle in the Scottish Highlands.

But the ‘London premium’ has grown so extreme that you don’t even have to move that far out of the capital to get a lot more space for your money.

And that’s yet another reason why the London bubble’s days are numbered.

The ‘London premium’ hasn’t always existed

For anyone under the age of 40, London property has always been more expensive than the surrounding countryside. We just take it for granted.

However, it wasn’t always the case.

According to the Nationwide’s regional indices, until the mid-1990s, the gap between Greater London house prices and those in the ‘Outer Metropolitan’ area (which includes areas such as central Kent, south Essex and the northern part of West Sussex) was very small. Indeed, from 1973 to around 1995, the commuter belt sometimes became slightly more expensive than London for prolonged periods.

In the case of the ‘Outer South East’ there was always a more substantial gap. That’s not surprising, as these areas are a lot further away from the capital. Even so, apart from the late ‘80s bubble, the London premium still remained between 20% and 30%.

As the chart below shows, the mid-‘90s is when the gap really started to grow. But even as late as a decade ago, London property cost only 10% more than the Outer Metropolitan area, and 30% more than the Outer South East.

The gap today is an incredible 32% for the Outer Metropolitan, and 67% for the Outer South East.

Greater London property price premium

Source: Nationwide

This isn’t just a glitch in the Nationwide data. Data from Halifax only looks at the Southeast as a whole, rather than splitting it, but it tells a similar story. From 1983 to 1995, the London premium over the South East was typically less than 5%. Now it’s a record 30%.

Of course, the ‘South East’ and ‘Outer Metropolitan’ are vast areas. They include many towns with poor links to the capital, which could be dragging down the average price. But the Land Registry includes more detailed data, which allows us to focus on the towns with the best links to London.


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The Land Registry’s price data is compiled using a different methodology (you can learn more about all the different indices here).

But it’s still clear that prices in Greater London have risen by far more than in commuter towns such as Reading, Harrow, Slough and Milton Keynes (all of which are less than an hour away by train). Only Brighton and Hove (AKA London-on-Sea) has managed to keep pace.

Lonodn property prices v satellite towns

Source: Land Registry

And it’s not just the commuter belt that has been left behind by London’s bubble.

London’s outer suburbs have steadily fallen behind the rest of the city too. As the chart below shows, in 1995 prices in four outer boroughs (Bromley, Havering, Enfield and Hillingdon) were close to the average for Greater London.

But now the average property in Havering goes for about two-thirds of the London average. Even Bromley, which used to be only 0.5% lower than the average, is now 20% cheaper.

Outer London property prices

Source: Land Registry

The power of extreme prices

That’s a lot of data to take in. But the crucial point is this: all of these areas are cheaper relative to the rest of London than at almost any point in history.

If there’s one financial constant we believe in here at MoneyWeek, it’s ‘reversion to the mean’. In short, when a price trend gets way out of whack with history, you can bet that it will go back to trend at some point.

There’s no telling when. But typically, the more extreme the move, the more extreme the eventual correction. That’s because extreme prices stimulate changes in the ‘real’ world, and these ultimately push prices back into line.

For example, the record strength of the Japanese yen in the lead-up to 2012 was a big factor in forcing the Japanese central bank to embrace full-blown quantitative easing.

High and rising oil prices over the past decade or so have stimulated the development of everything from shale gas to electric cars.

And now there are signs that London’s extreme prices are stimulating change.

As Merryn has pointed out, developers have rushed to cash in on high prices in inner London. According to the planning organisation New London Architecture, there are over 236 new tower projects in the pipeline. While some involve office space, most (just under 190) focus on providing residential flats. Overall, the aim is to build 42,000 new homes a year.

Meanwhile, councils are starting to crack down on ‘buy to leave’ landlords, who buy property only to leave it empty. Islington has announced plans for £60,000 fines.

At the same time, improved transport links, especially Crossrail, will cut journey times to the suburbs and nearby towns even further. This will expand the size of the commuter belt, effectively increasing the supply of property for London workers.

There are already some signs that people are starting to realise the price advantages of moving outside London. In their latest report, estate agency Savills claim to have found “the first signs of wealth beginning to flow out of the capital, and this has become even more evident so far this year”. They expect “more London buyers will make the move out to the regions, and take advantage of the price gap.

Of course, reversion to the mean could be caused by London prices falling, or prices elsewhere rising – or perhaps most likely, a combination of the two.

But I’d be very surprised if the London premium is still as wide by this time next year. If you’re a Londoner thinking of trading down to the countryside, I’d start the hunt soon.

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33 Responses

  1. 03/04/2014, Quant wrote

    Having started off last year looking to buy a flat in Hampstead/Highgate, I was shocked at the prices rises from right under our feet (places we were looking at moved up 20% in 3 months from April to July). Disgusted by the sudden price moves we bought a house in Enfield in the end, sort of Southgate/Palmers Green area with my commute being from Palmers Green rail to Moorgate in 20mins :). Much happier with that choice. House rather than a flat, can breathe the air and although the prices are still ridiculous they are nowhere near as ridiculous as Prime London areas!

  2. 03/04/2014, David 1963 wrote

    Sounds like the ideal time for the London councils to introduce some extra bandings for council tax, say, at values over £2.5m, £5m, £10, £25m etc.

  3. 03/04/2014, Swansea Bob wrote

    My daughter is an associate in a firm of City lawyers. She has to be in work at 8.00am and often does not leave until 10.00pm. Most people she knows in commercial law have similar work patterns – and the same is true of Banking, brokerage and private equity work. All fighting for accommodation within reasonable travel time of the Square Mile.

    So the choice is stark – leave London (and lose 50% or more in salary terms) or stay and pay. But the sheer concentration of the legal and financial sector in London (which supports the bars, restaurants , IT people, transport and retail) means that in reality mid-salaried staff – earning between sixty and a hundred thousand – are stuck.

  4. 03/04/2014, agishen wrote

    This article has the feel of someone wanting to talk down the London property market. Perhaps someone who is looking to buy but watching it move higher every month? Agree that is a frustrating position to be in but this market is not going anywhere… London property has been going up for the last 1000 years. Difficult to argue with that fact.

  5. 03/04/2014, finisc wrote

    The story here is increasing reluctance to commute by car and also the increase cost, crowding and poor reliability of trains. Both combined with increased working hours in certain sectors. There is a also a big social network effect you benefit from by living centrally and being in easy commuting distance of other people.

  6. 03/04/2014, Quant wrote

    Moneyweek has been wrongly predicting the demise of the London property market for years so I understand why there are so many detracting comments however the attitude of “property always goes up” is pure ignorance…

  7. 03/04/2014, GFL wrote

    This is really silly article; it ignores so many factors that are propping up London properties and just focuses on a fairly meaningless ratio between central London and the commuter belt. I agree property prices in London are insane, but as long as the city of London thrives and foreign money continues to flow into the capital I can’t see a major correction. One day, this will no longer be the case, at which point there will be a major correction, but it will not be due to some stupid ratio between a house in Mayfair and Dagenham.

    Also there is so much loose money floating about at the moment, just look at interest rates, equity prices and indeed house prices. Those that work in banking, law, etc are the closest to cheap money! Even the trickledown effect reaches those close to London quicker than other parts of the country; so the south-east has a whole might be doing as well as London but it’d doing alot better than the midlands or the north.

  8. 03/04/2014, matt hue wrote

    Although it might be considered a minor impact, in comparison, it’s still worth considering how bland and unappealing the suburbs of London have become.

    The relentless change from independent shops/bars/cafes/restaurants/etc towards strips of the same uninspiring global chains is surely making the prospect of a move to such places less attractive and so leading to less demand.

  9. 03/04/2014, Quant wrote

    Matt, that is true of prime london as well. Feel free to visit the Hampstead Cafe’ Rouge, Starbucks, le pain quotidien, Paul, Dim T etc etc Highgate is even worse.

  10. 03/04/2014, Paul Claireaux wrote

    Excellent piece again Matthew.
    And for a reminder of the wider picture – take a look here – http://wp.me/p45vXF-cH

  11. 03/04/2014, Nobody wrote

    GFL’s comment is the only one to even get close to the real story of the property bubble in London. I lived in Knightsbridge in the 1960′s & 70′s, & now live in Chiswick. I have been involved, in some way, with the property business most of my life.
    London has become a rich mans investment tool. Wealthy people from all round the world see it as an investment and have been buying land here for the last 20/30 years. The value of residential property in Central London has nothing to do with the British economy, and everything to do with international money looking for a home.
    Young people looking to live in Central London? Dream on. Unless you’re incredibly successful, or your parents help you.
    Sadly, I think the article is whistling in the wind. Prices will only come down when our government has the courage to make it far less attractive for foreign investors. Please be aware that on that day, when it comes, the effect will be painful for everyone left behind.

  12. 03/04/2014, Alec wrote

    Once again it’s cheap money that got us into this mess. Foreign buyers making up 70% of London property purchases. They love parking their money in the capital as it’s perceived as a safe investment rather than continental Europe, the Middle and Far East. No wonder estate agents are peddling their developers’ fancy properties around the world. Osborne and Cameron also love it particularly the stamp duty. As mentioned before, this government has only one policy, to keep the property bubble fully inflated. They have even become mortgage brokers handing out 20% of taxpayers money to people that can’t afford to buy houses because the financial market has been rigged by Osborne, Cameron and the poodle at the BoE.

  13. 04/04/2014, CaptainPeacock wrote

    @agishen

    RE: ”London property has been going up for the last 1000 years. Difficult to argue with that fact.”

    What planet are you on?

    From late 1989 to 1996 London property went down and…down BIG TIME!

  14. 04/04/2014, CaptainPeacock wrote

    BTW, Alec your post is SPOT ON …well said!

    You have a brain unlike some posters LOL…

  15. 04/04/2014, Paul Claireaux wrote

    It’s interesting to see some of the comments here suggesting that London is NOT in a bubble.
    I really think Matthew has got it right here guys – check out this image of the extremes in regions over time.
    Does anyone still think London is not looking over the edge of a cliff?
    http://wp.me/p45vXF-cZ

  16. 04/04/2014, Simon Burnett wrote

    85% of prime central london property was bought by overseas buyers, and 70% of all central London property bought by people from abroad. These are not people who are looking to commute in from Milton Keynes, no matter how attractive the relative pricing. If we examine the sources and trends of foreigners’ wealth and any prospective legislation, we can estimate central London price changes. Rising oil prices would be a great start. Foreign buyers in central London is an established trend, and until it changes it’s never going to be 1983 again. (Much though many of us would like to be able to live in the attractive parts of our capital).

  17. 04/04/2014, Ellen12 wrote

    “Why does so much foreign money want a home specifically in London?” and “Why do out politicians want them to tie up housing in the capital when they, themselves, talk about ‘a housing crisis’?” “Why compromise the wellbeing of people who live, work and contribute towards the UK economy in favour of those who may be hiding ‘filthy lucre’ from those it was taken from?

    The widespread corruption that appears to be out of control inside the banking world has become abundantly clear since the financial crash of 2008 but what is less apparent is why our politicians seem to be complicit in, what often amounts to, criminal activity within the financial sector.

    There do seem to be serious shortcomings in our leaders ability to use a moral compass in their dealings generally whether it is lying about tuition fees to rallying around MPs who fiddle their expenses and frustrate the investigation. An audience member on Question Time last night, when faced with three serving MPs who felt her conduct was acceptable, said he would be fired if he had fiddled his expenses. It does rather put question marks over the integrity of MPs who regard criminal behaviour as acceptable as much as the person who is being investigated.

  18. 04/04/2014, Critic Al Rick wrote

    It smacks of desperation to me, Ellen; the dying throes of a mature democracy. Parasites (very rich) spawn Parasites (rich) spawn Parasites (poor and intermediate); collectively they ‘kill’ their Host, the Truly Private Sector.

    The UK, if not the West generally, is supporting far more Parasites than it can do by fair means (Balance of Payments Surplus) and increasingly resorts to foul means (such as The CoLC, QE, compromisation of the ‘family silver’, and pillaging of the TPS).

    Exponential trends, such as the growth in the resort to foul means, have a habit of ending abruptly and catastrophically; sooner or later there’s going to be a very rude awakening; unfortunately, probably indiscrimate.

    And yes; the disintegrity of our elected representatives is fundamentally to blame for the properties of mature democracy. What a load of hypocrites…

  19. 05/04/2014, Boris MacDonut wrote

    What happened in the early 90′s to turn the situationin central London. The end of the Cold war. A flood of money from the “Wild East”. There are now 320,000 Russians in London , another 150,000 in Cyprus , tens of thousands in Sapin and on the Riviera. One of the worst things that could occur soon is a further cooling in western relations with Putin.

  20. 06/04/2014, Bonecrusher wrote

    For the first time in my working life,and having worked and lived in central London since the early 80′s we are now in a different climate. In business it is often thought when there is too much government interference in an industry it is time to move on. Now that is the case with property, particularly the high end London type.
    There is very high stamp duty , GGT for foreign owners,and the high chance of mansion tax. Throw in bad publicity about ghost taxes from councils and many higher properties now sitting on the Market for many months.
    Remember Tokyo property in the 90′s and London in 2009 when prices fell some 20 per cent very fast.
    This is the perfect background for a very substantial fall.
    A perfect scenario for a

  21. 06/04/2014, ANDY2014 wrote

    The Central London property playing field is much tilted in favour of the foreign buyers due to tax advantages still being enjoyed by non resident entities.

    Although the Government is extending the Capital Gains Tax to non U K residents from April 2015, a non resident can still purchase a PCL property in in the name of an overseas company such as a BVI offshore company and whenever he wants to sell the property, he simply sell the shares of the overseas company. As such transaction does not take place in the UK, NO capital gains Tax , stamp Duty or inheritance Tax is due.

    The Government must make it a legal requirement for overseas companies buying residential property in the UK to declare the names of its shareholders and to inform the Government whenever there are changes, in order to impose the taxes arising on each transaction.

  22. 10/04/2014, Dandy wrote

    The London inflation figure is much higher than the rest of the UK. Prices are driven by demand. The domestic demand alone exceeds the supply. We will never meet the demand so prices are going to keep increasing for the foreseeable future.

  23. 10/04/2014, Dandy wrote

    Foreigners only own 3% of the total stock. Buying levels by foreigners are no higher now than they were in 1990. This market is not driven by foreign investment.

    • 20/04/2014, Boris MacDonut wrote

      Dandy where do you get 3% from? Last year between 70% and 85% of all central London and Prime property was sold to foreigners. 50% of all over £1 million and 85% of all over £20 million. 9% of these to Russians, 7% to Arabs and 5% to Chinese. The boom is always driven from the top and is driven by foreign money.

  24. 10/04/2014, robin wrote

    Yes London property is overvalued.

    But is it overvalued when gauged as an investment vehicle for rich foreigners? Not as long as inflation is so low. When inflation goes, up we can but hope that the pound weakens and then finally London will not look so good.

    Domestically, there are two ways out. A house crash. This won’t happen in a dramatic way as the fallout would be immense. The alternative is inflation. I think we will have a mix of both. But its inevitable; the only way out realistically is inflation. And when that kicks off there will be a crash in london specifically. And its not much use buying gold as that day may be suspended for quite a few years. I’m amazed at the BoE’s ability to keep us balancing on this pin-head.

  25. 11/04/2014, tuesday wrote

    I live in a house I own outright in central London and I own another flat I let in central London. I can confirm all your worst fears – it’s great to live here and great to know that the value of property is going up. Is it fair? No. Is it crazy? Yes. Will it last? Probably not. Do Money Week have a chip on their shoulder about it? Absolutely. Do they know what they are talking about? I don’t think so.

    Over the last SIX years, they have used every argument: interest rates, inflation, deflation, the end of the euro, the end of the pound, the end of Britain, social unrest, affordability but it has made no difference. It is very simple. A lot of people want to live here – because it is an amazing place, households are getting smaller – i.e. more people live alone or in twos, Europe has open borders.

    Can all that change? For sure. Will it? Probably not..

    • 25/04/2014, agishen wrote

      Game, set and match. This post sums up the debate in one.

    • 25/04/2014, Quant wrote

      “Will it last? Probably Not”…”Will it change? Probably Not”

      Yip you’re definitely right, it probably won’t last and hence the bubble will pop – whilst simultaneously, it probably won’t change and hence london property prices will keep going up :P

      Jees, good thing you hit the goldmine and don’t ever have to rely on rational thinking!

      • 02/05/2014, tuesday wrote

        To clarify:

        Do I think it will keep going up for ever? No, probably not

        Do I think it will crash devastatingly the way MW has predicted for years and often seem to hope for? No, probably not!

        There is a difference (a rather wide one) between the two poles

  26. 24/04/2014, Pinkers Post wrote

    There never was a “bubble”. Indeed, bubbles don’t really exist. As ever, it’s a;; about supply & demand. Furthermore, there is little point looking at historical data. London has changed dramatically over the last 20 years and has become by far more cosmopolitan. It has become the ‘world’s capital’, more diverse than any other metropolis and geographically perfectly positioned. London is not England. London is London and any potential buyer is, de facto, an international buyer.

  27. 01/05/2014, justsomeone wrote

    So lets assume London prices will fall….say 15% in 1 yr, lets look at the big picture hre: prices have gone up a lot at least in my area (Fulham – 50-70% you pick a number) in the past 5-6 years… what happens next? over time (5-10-15-20-25-30 years) the trend is clear: London property does ok as an asset class (whether you live there or as a foreign/local investor). look today at price charts of London property from the 50-60-70s – the crash of late 80′s- early 90′s and the 2008-09 periods look so irrelevant, especially if you live in the house you bought. yes prices got a bit out of control, like in any major city in the world from Sydney to HK, from NYC to Paris. just make sure you can service your mortgage even when rates go higher and who cares about MTM your house on a monthly/yearly basis – over time you will do just fine.

  28. 05/05/2014, Pinkers Post wrote

    The London ‘property bubble’ is a myth. There is no bubble and there never has been one

    • 06/05/2014, Boris MacDonut wrote

      Pinkers .I agree. If Matthew says the days are numbered I can put a number on it. At least 9 years, so 3,200 days.

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