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The oil price crash and European QE will pop London’s property bubble
London property prices have reached ludicrous heights. Dr Matthew Partridge looks at what could pop the bubble, and how far prices could fall.
With areas of London resembling ghost towns, prices in the capital look set to stall
Every property bubble has a statistic that brings home how crazy things are.
For example, at the height of the Japanese bubble in the 1980s, the land around the emperor's palace in Tokyo was said to be worth more than the entire state of California.
Now we've seen the British equivalent. The value of London property is now higher than Brazil's GDP, according to research by estate agents Savills.
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Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
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Foreign money has kept the London property bubble inflated but now it's leaving
Up to 70% of the property sold in central London in the last few years has gone to non-UK residents. For London as a whole, the figure is around 20%. By far the biggest group of buyers is the Russians. They account for one in every five property sales worth £10m or more.
You can see the appeal. As well as the shopping, museums and schools, you have a very generous tax system for those who aren't British citizens. The reliable rule of law and political stability is another big draw. If you were a Russian oligarch, would you rather keep your money at Putin's mercy in Moscow? Or squirrel it away in London?
And it's not just Russian buyers who are drawn by these benefits. The rolling eurozone crisis has sent a lot of money Britain's way. You can bet that the Arab Spring' had a similar effect on funds from the Middle East.
As a result, lots of the wealth generated by $100 a barrel oil has gone into London property.
Plunging oil prices and eurozone QE bad news for London property
More generally, an increasing sense of resentment and popular uproar about ghost towns' areas of London entirely dominated by second homes is adding to pressure to tax wealthy and foreign property owners more heavily. Depending on the election result in May, a mansion tax' may even be introduced.
As a result, many potential overseas buyers are no doubt thinking twice about owning property in the capital even if they can still afford it.
Another more recent big move is also likely to put pressure on London property the European Central Bank's (ECB) decision to launch quantitative easing (QE) last week.
As my colleague John Stepek points out, this will hit the value of the euro. The single currency has already fallen hard against sterling. But Nicholas Gartside of JP Morgan's Strategic Bond Fund thinks it could fall by another 10%.
That makes London property more expensive for eurozone buyers. Perhaps more importantly, the fact that the ECB has started printing money is likely to reassure jittery investors. Any sign of a wider recovery could see money start to flow out of London and back into cheap eurozone assets.
How far could prices fall?
So for now the consensus is that UK house prices will stay roughly where they are remaining broadly flat in London, and rising a bit outside London. In fact, as my colleague Merryn Somerset Webb has noted, now could be a good time to downsize from capital to country, if that's on your to do' list.
But this notion of flat prices could be rather too cosy a view. Markets particularly grossly overvalued ones rarely just flatline. They tend to overshoot on the upside and then undershoot to the downside once they lose momentum.
Demographics expert Paul Hodges reckons that prices could (and perhaps even should) fall by a lot more as much as 50%. If you missed Merryn's interview with him, you really should watch it here now.
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