20th May 2014
It’s not quite Dutch style tulip mania but the Central London property market may be subject to forces we haven’t seen before.
Among other challenges, is it incredibly difficult to see how the Bank of England alone could even restrain what is known in some circles as Prime Central London even if it wanted to without huge ramifications for the rest of the UK.
Clearly existing owners are in some cases selling to overseas cash buyers in the central zones and some are taking the cash and buying in the next cheapest zone out with big knock on effects at least to Greater London and perhaps across the English home counties. This has led an extra air of unreality to the property boom. It is not all driven by domestic demand alone – strong as it is in comparison with supply.
It is difficult to understand how much this process may be affected by interest rate rises, the sort of action the Bank of England does not want to take anyway, given its belief that the economic recovery remains fragile. As if to underline that vulnerability of many across the country, the Resolution Foundation says around a quarter of mortgage holders would be paying a third of their income on their mortgage were rates to rise to around 3% by 2018 in line with expectations.
Interest rate rises might also have less impact on those with very low loan to value loans who may be taking the opportunity to move to the country – or at least Essex or Surrey. These borrowers can obtain loans at a lower interest rate, they probably pass the Mortgage Market Review with flying colours on affordability if they have paid down a lot of their mortgage. Indeed if your capital is restricted as a lender they are the sort of high quality loans you might want to make anyway even if surveyors are being more cautious.
It is not that borrowers are immune to interest rate rises or the other measures the bank might take, but it might take action of a greater magnitude to make an impact once again with repercussions for everyone else.
Central London has become even more firmly engaged and connected with the international economy with buy-to-let investors from Asia and very wealthy investors from around the world and its trouble spots ploughing their capital into the capital.
Could something happen to reverse those flows? What if rental returns began to lag whatever borrowing arrangements these much talked about Asian middle classes had secured? Or do you dare restrain such investment with the tax system?
Not everyone is bullish on central London with even the Duke of Westminster isn’t so as the the Guardian reported recently.
He has sold some properties in Westminster though he is still investing south of the Thames.
But it’s not just a question of whether the fundamentals still apply because some of those fundamentals are so different this time out. Given that some of the drivers of the market are well beyond the UK, there is a big challenge in measuring them, understanding them, the subsequent knock on effect, and what to do about it. The Bank of England may be in an even less enviable position that might be imagined.