Three signs that the London housing market has gone mad

I’ve been flat hunting in London for the past few weeks. I already knew the market was pretty over-heated, but there’s nothing like grim first-hand experience to show you just how mad it is out there.

Flat viewings are mobbed. One place I saw had over 90 people view it in a single showing. And they’re being snapped up. Go to see a flat over the weekend and you’ll need to put an offer in by Monday lunchtime if you want to have a hope.

Prices are well above their pre-crash levels. I saw a basement flat that went for £210,000 in 2006 being put on the market for £350,000.

But it sold for even more. The asking price seems to have become a floor rather than a ceiling. Rather than haggle for £10,000-£15,000 off the list price, you’re expected to offer quite a bit more.

Now, maybe I’ve been unlucky with where I’m looking. But there’s plenty of hard evidence that this sort of things is happening across the board. All the figures point to this being a massive bubble – here are three key points that prove it…

1. Buyers are paying the asking price

The first major sign that there’s a bubble is the fact that the gap between the asking price and the agreed price has all but vanished.

Estate agents like to use the promise of high valuations to persuade homeowners to sign up with them. Of course, buyers know this is going on, so they tend to put in a low-ball offer. As a result, the final deal lies somewhere between the two.

However, according to property website Hometrack, this gap has shrunk to just 2%. Buyers are so desperate that any concept of negotiation has gone out of the window. It also implies that prices are rising so fast that even estate agents are unable to keep up.

Hometrack’s historic data, which goes back to 2001, suggests that this indicator is a reliable sign that housing prices may be about to peak. Take a look at the chart below, courtesy of Hometrack.

% asking price achieved– aggregated regions

UK house prices % asking price achieved

The purple line shows Greater London. The last time sellers were getting offers this close to their asking price, was in the summer of 2007, a few months before the market turned.

Similarly, the gap was at its widest in December 2008, around the same time as London prices hit their bottom.

As you can see, it’s quite clear that prices elsewhere in the country, particularly anywhere north of the M25, are nowhere near as overheated as London.

But in London, if anything, the bubble is even worse than last time. In the summer of 2007, the gap was 3% – this time it is only 2%.

2. Properties are being snapped up

Another indicator is that London properties are being snapped up almost as soon as they go on the market. As you’d expect, there’s normally a lag between a property being listed and the date an offer is accepted. And the slower the market, the longer the lag.

Now take a look at Hometrack’s chart below.

Time on market – aggregated regions

UK house prices Time on market

As you can see, the average time on the market in London shrunk to as little as 2.7 weeks in January. Even if you take a three-month average it is still just over three weeks.

At the bottom of the market in early 2008 it took two and a half months to make a sale. The historical average since 2001 is 5.2 weeks. We haven’t seen this sort of enthusiasm in the market since the first part of 2007.

Again this suggests that buyers are making quick judgements. Instead of looking around, and thinking things through, they are jumping at the first thing available in a desire not to be ‘left behind’. This is typical of what happens when bubbles reach their peak.

3. Prices are surpassing 2007 peak

Another indication that things are getting crazy in the capital is that prices are now well above the peaks set before the last crisis. According to Nationwide, greater London prices are now 13.5% higher than they were in the fourth quarter of 2007. Similarly, the Land Registry data shows that prices have risen by an even greater amount – 15.2%.

Of course, it’s been more than six years since the crash – so you would expect prices to reach their past peaks eventually. And not every index is setting new records. Halifax, which keeps its own measure, thinks prices are still around 4% lower.

But given that wages have barely shifted since the financial crisis, the sort of rebound we’ve seen in London is about far more than just keeping up with inflation.

In fact, Nationwide estimates that at 7.5 (compared with a previous peak of 7.2 in 2007), the ratio of first-time buyer house prices to mean gross earnings in London is the highest it has been since the survey started in 1983.

I need to rethink my flat-hunting strategy

These three ‘warning lights’ are classic signs of a bubble about to burst. They were certainly a wake-up call for me. While I won’t give up my search for a flat quite yet, I will rethink my strategy.

Of course, if I don’t buy now, there’s the risk that I’ll miss out on the rest of the bubble. And if you’d bought at the end of 2005, two years before the peak, and sold at the trough in late 2008, you would still have made money.

However, history suggests that was exceptional. If you had bought in 1987, and held through the 1989-92 crash, you would have had to wait until 1996 to see your purchase regain its original value (and that’s not even accounting for inflation).

• This article is taken from our free daily investment email, Money Morning. Sign up to Money Morning here.

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  • Dunnas

    In South Wimbledon my bid of £70k over the asking price failed. The successful bid was in excess of £90k over the asking price. The dire lack of housing stock is the primary cause but agents are adding to the phenomena by creating unprecedented hypes through open days, and yes it is a matter of viewing on Saturday and getting your bids in by 1pm latest on Monday with final and best by Tuesday. I too am re-thinking strategy and waitting until more houses come onto the market in the next month or three is one option.

    • Rabster

      Ahaaa ….South Wimbledon…post code envy 🙂

  • Spog

    The answer is not to look where everyone else is looking, and to focus on transport links. For example, you can buy a 3 bed Clapham type house in Abbey Wood [west of Woolwich] for under £300k which, when Crossrail opens, will have a commute to Dockland of 15 mins, City 20 mins and Bond St 25 mins. This beats the south, west and north of London hands down. Also you are a 20 min drive from the M25. The old days of moving a bit further out and still being in commutable distance are over; you have to be a bit of a geographical and social pioneer, as were the original Claphamites 40 years ago.

  • Jonathan Tedd

    This is the polar opposite of how to solve our chronic housing market – ridiculous restrictive planning laws and ridiculous cheap money, massive financialization in the City made worse by QE, and then a govt scheme to get more suckers in.

    it’s going to be a beautiful thing when it pops.

    • Rabster

      What chronic housing market?

      Everythings just fine outside the southeast.

      J Tedd, you really need to get out abit.

  • Andy Boast

    Cash buyers are certainly the winners in this race – but there are ways to make your offer more successful.

    1.Get a mortgage in principle and tell the agent you have this when you make an offer.
    2. Be in with the agents. I’ve bought recently and the only way we got the property we wanted was to be on the waiting list of the local Agents. Go in, speak to them. Let them know you are financially ready because if you wait until it hits Rightmove, the property will already be sold.
    3. Get a bigger deposit. There are ways to buy together and share a mortgage with other people looking to buy. Covered with a co-hab agreement. After 2 years you can sell and go your own way. This seems to be the new in thing in London to do to get a better interest rate on a low LTV rate and it means if costs go up, they can be split by the owners. To share a mortgage you can have up to 4 people buying and Barclays Bank are even suggesting it as an idea.
    If there is a property crash, sharing the mortgage repayments means you can weather the storm, and as this boom is showing us, property prices will always come back to being better value than when you bought; you just might have to wait a while.

    • Rabster

      Let me make it even easier then you outline …………….get out of the south east!

    • robin

      Rather don’t get in at all. All the tricks in the world don’t matter if the housing market is overpriced.

      Stay away!

      It will adjust, and if it doesn’t, you wouldn’t want to live there anyway. Living standards will drop (if they haven’t already), or houses will come down.

      Remember you’ve got 25 years to pay off the mortgage. Alternatively you have 25 years to wait for prices to be reasonable.

  • Rabster

    A silly set of questions that may solve your dilemma and that of others in the south east.

    Why buy in London?

    Why live in London ?

    Why work in London ?

    Why have a business based in London?

    Money Week is not a bank or financial institution that needs the kudos of a London base.
    Much of your business could be done from anywhere in the world let alone the UK.
    You can research your articles from the internet, email them to editors, phone to discuss etc etc etc
    So why ?

    It is your own madness that drives you to these ends.
    Travel up the M1 and smell the fresh air of real people with real lives living in real houses (that’s right houses not basement flats) not drowning in their own wine bar sipping, thin latte drinking bullsh!t self important existence !

    • Andy Boast

      Average property price in London in October 2011 was £338,320 and 2 years 2 months is £409,881. If you can get on the ladder in London and cover the mortgage, living costs, then £71,561 (21%) is quite an appealing draw to buy in the big smoke.

      You do make an excellent argument. There is a balance; lifestyle or money?

      • robin

        Profits, so called, made in the past don’t guarantee profits in the future. Especially with something like houses.

  • Paul Islington

    The problem is not with the market, but with the estate agent. They create the franzy we are seeing in the market.
    I bought a family house in islington last year, and out of the 4 agents we used for our search, I would have revoked the realtor license of 3 of them, had I been a regulator.
    The most shocking one bluntly told us that our offer would not be accepted if we were not using the lenders they were partnering with.
    The estate agent ombud doesn’t give a damn about this type of practice, barely covering for it.

    • robin

      That’s a very interesting anecdote, and while I won’t disagree that estate agents can be corrupt, I feel I must assert that this is very much about the housing market.

      A healthy market would remove the opportunity for these people to abuse the system like this.

      Our restrictive planning system, and the resulting dearth of good housing has been brought about by bankers and politicians in order to create a market over which investment banking can operate.

      Financial derivatives are a form of gearing based on the underlying asset, and nothing is worth as much as housing. So the financial industry is as big as it is, because houses are as expensive as they are.

      And if houses reverted to their proper price, the banks would be sunk. This is lala land. At some point we will either fail like the communists because we lose all touch with the free market system, or we will reassert the free market system and houses will adjust downwards.

    • df75

      Did the initals start with DA?

  • Jim Tallis

    Why live in London? Because unfortunately it is not only the author of this article looking for a place to buy in London. It’s the tens of thousand others too. Like it or not….London is the business hub of the UK, attracting talent from all over the UK. This is exactly the kind of place that international companies want to be based. And as a freelance worker…this is where most of the contracts are.

    This booms is certainly a london thing…and its london that need more houses, particularly for owner occupiers and not multiple property owning landlords.

  • Ellen12

    I suspect Mark Carney was drafted in by Osbourne for this specific purpose and I think we are looking at one of the most ruthless tory cabinet ever who have no trouble with hunger and homelessness among their citizenry. Their focus is solely on remaining in power by pandering to those they suppose will vote for them although I think they have marginalised huge numbers of their own potential younger voters. I certainly dont have the stomach for a second term of office of what we have in power now and plan on voting against them rather than for anybody else

    • haircut

      Yawn !

      Money is quite a boring subject, but politics…. zzzzzzzzzzzzzzz

      What am i doing on this web site ? Good question !

      • Ellen12

        Well, other peoples survival may be boring old politics to you. And yes, it is politics, the politics of creating scarcity and exploiting people on the back of this manufactured scarcity. I do not believe there is any shortage of housing. There are buy to let empires built on keeping housing out of reach of growing numbers of people. At least Ed Milibznd is naking the right noises in this regard, despite Blairs abyssmal contribution to it.

        • haircut

          Calm down Ellen, I mistakenly thought that I was on a money web site as I have zero interest in politics

          With regard to your first comment, i would guess, and I’m only guessing, that very few people on this forum would give two hoots about who you would vote for at the next election ?

          Perhaps the word Money is a beacon that attracts attention like a Fracking rig attracts environmental protesters?

          • Ellen12

            By your use of the casual put downs that are reserved for women in this culture, “Calm down, dear”, I suspect you may have more than a passing interest in similar politics to that of David Cameron.

            With regard to whether you find money or politics interesting or not, I doubt many people give two hoots!

            • haircut

              Ellen, I would use the expression ‘calm down’ to anyone, male or female.

              As I said I have NO interest in politics. Who is that David Cameron chap anyway?

              Right I must be off to a politics web site to see if anyone is talking about money !

              • cherrybrulee

                Ellen I totally agree with you. Money and politics are inextricably linked, especially with this sorry shower in charge. Its the average person paying the price with inflationary QE etc. cant believe some people dont respond well to intelligent conversation, and have to resort to sorry phrases from some twit on a car advert.

                • Romford_Dave

                  You do realise that it was Ellen who introduced the phrase from the advert?

      • Critic Al Rick

        So when, the issue of boredom waived, over the past 4 decades were the scissors applied between money and politics?

        Do you consider the London housing market not to be inextricably linked with global politics?

  • Alan Jersey

    A friend recently put his N London Victorian semi on the market. The agent organised a viewing, there were five offers on the first day, so the agent recommended a sealed bid. The accepted bid out of many was more than 7% above the original asking price.
    Bubble indeed, but in London it may be that there are simply not enough properties available, a condition that has prevailed for some time. Can this be true further away from the capital and home counties.

  • Boris MacDonut

    Bubbles are debt fuelled. Only 38% of London sales are currently based on borrowed money. For £1millionplus homes 70% go to foreign cash buyers. Hence the reluctance to upset putin lest he annex Kensington too.

  • Soldoutpeople

    i never understand why people put themselves in so much financial stress. i guess its not about shelter and only about profits (Sad state of affairs). I live in Sussex north of Brighton. i feel like i have the best of both worlds. near Brigthon that is just great fun and only 1 hour from london and the countryside of the southdowns is beautiful. House prices are so much less stressful than london. the commute to london is not bad either but the benefits are really worth it.
    what i would be concerned by is that a crash will happen in the future and given the bubble that has grown then fear will turn into panic. history never fails us.

  • CaptainPeacock

    …the CRASH will happen that’s for SURE!

    Housing shortage for price rises…? PURE poppycock!

    A house is only worth what the next MUG punter will pay…

    When the party stops and it will as… History in the UK housing bubbles has show again and again, BUT…

    This will be the mother of all House price MELTDOWNS …like a Hiroshima Bomb going off!

  • df75

    Unfortunately in London there are enough “mug punters’ and not enough “nice” houses to ensure prices keep on rocketing.
    Friends have just sold a small 3 bed Victorian terrace in east london to first-time buyers for over 3/4 of a million pounds, 30 viewings, got 4 bids over the asking the Monday after the open day. First time buyers! There certainly seem to be enough people with help, or two good salaries, to be servicing the repayments on these houses.
    Bank of Mum and Dad, cheap borrowing, cash buyers, all throwing fuel to the flames.
    In my opinion the surveyors and banks aren’t helping, they are agreeing the ridiculous valuations, then your precedent is set and everyone else follows suit.

    Potentially the high prices will make a lot of wavering sellers come on the market which may introduce more choice and competition and hopefully stabilise prices somewhat.

    Tried to buy just over a year ago, vendor pulled out, same house is now Sold Subject to Contract for £200k more than the price I was looking at. Insane.

  • Carl – Brighton

    These three “signs” could be argued for being signs of a more efficient market.
    Estate agents setting prices better, information spreading more quickly and transaction time dropping.

    What is of more concern is affordability. There is a reason why average house prices have always been a function of wages, and are being driven up by such low interest rates.

  • CaptainPeacock

    @Carl – Brighton

    ‘low interest rates’ EXACTLY!

    These Muppets in power KNOW full well what low rates are doing, making ALL the home buyers mugs/sheeple feel rich!

    Look at average incomes how the heck can you justify these high house prices for a house even in the s-east, its ludicrous.

    Anyone with half a brain will understand that this house price BS IS being orchestrated by these Muppets in power, AND I expect it will only crash when rates rise…

    Carney has stated he will raise rates when the jobless figures gets down to 7%

    We must be there now?


    From what you read in the financial press this Carney talks in riddles and prattles on about head winds, blah, blah, blah, blah…

    Basically Carney prattles any crap to avoid raising rates, because they know the party would end!

  • CaptainPeacock

    BUT wait there’s More…

    The sheer audacity of DESPERATE Cameron:

  • Pinkers Post

    There is no such thing as property being ‘overvalued’. Current prices may appear high but there simply is no point using historical data to peddle the idea of a bubble. Prices are set by supply and demand and right now demand outstrips supply. Pricing of any good is always right at the time, let it be property or a dirty nappy. Yes, of course, the balance between supply and demand may well change tomorrow but that’s not the point. The widely used definition of the word ‘bubble’ is intrinsically flawed.

  • Realist

    Ellen. You say you can’t stomach another term of the Tories, but what is the alternative. While Labour may talk the talk, you know that that’s all it is. Through the years it has been shown time and again that Labour policies just don’t work and after their term in office it is up to the the others to clean up their mess.

  • CaptainPeacock

    RE:There is no such thing as property being ‘overvalued’.


    What planet are you on?

    In late 1987 I was a 23 year old persuaded to buy a house cos if you DON’T do it NOW… you will NEVER be able to afford one…

    This advice was given by so called experts (some in their mid 50’s) at work who said property NEVER goes down.

    18 months later house prices collapsed, with news on TV how much they were going down every week.

    [for the next several years you have NO idea of the struggles we went through to keep up payments & put up with negative-equity ect. If ONLY I did my own research instead of listening to pri*ks]

    RE:’Prices are set by supply and demand and right now demand outstrips supply.’


    These MUPPET’S in government will do everything in their power to keep property prices inflated.

    Do you think we would have these HIGH prices if there was NO government interference, i.e QE, low interest rates?

    It all seems SO so, rosy & dandy at the moment until the PARTY ends…Remember UK in 1990, Dubai in 2007,Spain, Ireland, etc.,etc.,etc.


  • Tan

    Isn’t there a chronic supply shortage?