London house prices: this could finally be it

House prices in central London have so far stubbonly refused to bow to the pressures of the financial crisis. But that could all be about to change.

One of the things I have been completely, utterly, totally wrong on over the lastfour to fiveyears has been the price of London property.

When the financial crisis kicked in, I was convinced that property prices across the UK would go down all at once. Definitely 20%; probably a lot more. Look at nominal prices and you will see that has happened to a degree. In Northern Ireland, prices are down over 50%, but most other places are only down 15% or so.

Look at it in real terms (taking inflation into account) and rather more carnage is clear. Scotland is down 27%, Yorkshire 29% and the South West as a whole is down24% (I put all the numbers on this into a chart for an episode of MWTV a few weeks ago).

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However, London is a different matter. Most of the country has made an excellent start on the path to price normalisation. But in London, prices in nominal terms have barely budged, while in real terms, they have fallen only 15% or so. And to add insult to injury, in prime central London (PCL) they have risen horribly fast.

The latest figures out from John D Wood show that the prices of PCL houses are up 6% in the last year alone and those of flats up over 20%.

We all know why we were wrong on PCL. We failed to anticipate just how much of a safe haven London would look relative to pretty much everywhere else in the world once therolling crisis started to hit Europe.

We also failed to see just how attractive it would look to the Russians and the Chinese looking to stash a little cash somewhere cheap (remember the only holding cost of a London house for a non-resident non dom is council tax), where their own rather nosier authorities might not notice it.

And finally, while we spotted the fact that the pound was likely to weaken, we didn't extrapolate that quite far enough to see that a falling currency would make London's houses look like an even better store of value to the rest of the world.

What is really irritating about all this, however, is that, had I checked the way in which PCL prices interact with the price of one of our more trusted assets gold I might never have made this maddening mistake. Look at the chart below.


Turns out that gold and PCL property move in much the same way there's a very clear correlation. Gold and PCL prices go up together and down together. Look at the second chart and you will see that isn't the case for UK property as a whole.


The international community considers lateral conversions in Kensington to be a globally safe real asset in times of trouble. It thinks the same of gold. It doesn't give a stuff for family houses in Liverpool.

So here's the interesting bit: the price of gold has just plummeted (we are still holding it for insurance purposes and we can't imagine looking back in ten years and considering that a bad idea see John Stepek's take on it here), but if gold prices are falling, does that mean London house prices finally will too? There would, at least, be some small consolation in that.

I know this blog postraises rather more questions than it answers (which is perhaps rather the point of blogs). In the next few weeks, John and I will be getting together with James Ferguson to talk about UK house prices in general and where we think they will go from 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.