Markets work – even in London

We wrote about the astounding levels of new housing supply in central London a few weeks ago. Proof, we said, that in all markets, demand – and the high prices it brings – creates its own supply.

Savills has now come out with an interesting report that touches on the same matter. According to analysts there, the London housing market now faces an oversupply of high-value homes for rent: it is building nearly four times as many ‘new prime’ properties (priced between £1,000-£2,000 a sq foot) as it actually needs.

You can read the whole report here, but the key problem it highlights is that this endless prime building comes at the expense of the lower end of the market where there is huge undersupply.

I can see the concern. But I suspect that it is less of a problem than a lot of people think it is. After all, what happens to high-end flats of which there is an apparent surplus, and for which there is no rental demand? The rent gets cheaper.

Lack of demand also creates its own supply – of less expensive flats. Make too much of an expensive thing and it will soon become cheaper. The Savills report suggests that “the prime markets are entering uncharted territory”. But that isn’t really so.

Note that average upper quartile rents in London have fallen over the last year (Hometrack). Even in the midst of London’s housing frenzy, markets are still working in exactly the same way they always have. Phew.