London house prices: how demand has created its own supply

Model of Battersea Power Station and luxury flats © Getty images
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.

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.