The real estate “bubble” is global

The real estate “bubble” is global

21 Mar 2019

In my round-up of Q4 2018 I mentioned three risks that I intended to keep an eye on.

Here are three really bad things that could happen in 2019 or preferably later. 1) London house prices fall by 20% rapidly or 40% gradually (or both) 2) A major issuer of government debt suffers a catastrophic collapse in confidence or actually defaults (will the person who said “China” see me afterwards?) 3) A neo-Marxist garden gnome becomes Prime Minister of Great Britain.

Numbers 2) and 3) remain of great interest but now I want to update myself on the developing story of property prices.

Two observations are becoming quite well known: the apparent insanity of new high rise apartments shooting up all over Zone 2 London and the decline in turnover of the traditional property market.


The FT had a good article on 20 February entitled “London’s property ‘flippers’ forced to sell at a loss”.

Flippers are speculators who buy flats off-plan before construction has begun. It seems that they are often individuals either originating from or actually still living in Asia. They are probably rather ignorant about what they have agreed to buy. According to the FT, someone lost £770,000 buying and selling an uncompleted apartment in One Blackfriars, a monstrous glass eyesore (obviously that’s just my unsophisticated opinion) towering over the Thames (which has surely been punished enough).

“In 2014, 21 per cent of resales in recently completed developments were sold at a discount, according to property research company LonRes. Last year that number had more than trebled, to 67 per cent. At the same time, the size of discounts has ballooned. From an average of 2.2 per cent in 2014, to 13.1 per cent last year.”

To be brutally frank, most Londoners just find these stories of burnt speculative fingers quite satisfying. Some might say that it’s payback for despoiling our historic city with your greed and ignorance. Others might suggest that this attitude is somewhat hypocritical, given that mutual self congratulation about how much everyone had made on their houses was the backbone of London dinner parties for about three decades.


Over those years many representatives of the “babyboomer” years dismissed the stock market as a glorified casino and convinced themselves and each other that their houses would become their pensions. This is why a material decline in the traditional property market – houses that people actually own rather than off-plan crow’s nests – is a serious matter.

Here is some recent news:

“The London sales market is in a prolonged downturn and the current uncertainty surrounding Brexit is clearly impacting consumer confidence.”

Foxtons Chairman: 28 February 2019

Foxtons is a leading London estate agent that relies primarily on the number of transactions. From a peak of 120,000 in London in 2014 these have declined every year to 85,000 in 2018. Over that period, revenues from property sales have halved. That’s what they mean by a “prolonged downturn”. At our dinner parties we talk about house prices but Foxtons sees the market as the place where supply and demand meet. (Click to enlarge the chart)


Anecdotal evidence suggests that sellers are still looking back up at peak prices and pulling their properties from the market when they receive nothing but low-ball bids. Buyers are putting out multiple low-ball bids and waiting until someone cracks. Because, as we know or should know, no one sells voluntarily into a falling market. Falling markets are fuelled by forced sellers.

Demographics guarantee that there will be forced sellers in time. The benign and orderly outcome would be a gentle managed decline in real prices until London property is again affordable for ordinary people who, you know, want to live in London. At present, the occupants  of a high proportion of privately owned London houses are older people on relatively low incomes who, if they wish to sell, will need to find relatively wealthy buyers with high incomes.

The effect of a dramatic fall in London property prices, which is arguably the next logical development of the Foxtons story, would be deflationary in as much as a great many people (the my-house-is-my-pension gang) would feel scarily worse off. This would be undesirable economically and politically in the short term (which in today’s world is sadly all that seems to matter).

Managing the probable decline of the housing market is, in my view, the principal reason why interest rates never rise in the UK. This can never be admitted publicly but fortunately in June 2016 Brexit came along and pretty much everything can be blamed on that (see the Foxtons statement above).

The financial crisis of 2007-9 might have burst the UK property bubble but, as we know, QE came to the rescue and propped up the prices of all long-term assets. The banks were preserved in a semi-zombified state and over-borrowed businesses were given time to de-leverage. Meanwhile, property prices, especially in London, were allowed to drift contentedly  along at “unaffordable” levels.


But cheap money, thanks to the Fed and most of the other central banks in the world, sloshed its way into every vaguely solvent and democratic country in the world (it really sucked to be Venezuela). Every so often I see a financial news article with the name of a country and the words “property bubble”. Try googling “house price boom” and the name of a country and the chances you will score a warning of an impending correction.

According to a website, property has become more affordable in the last ten years in the countries, like the US and the UK, where it was already looking dangerously inflated in 2009. It is in the previously “sensible” nations that things seem to be in danger of getting out of hand.

Numbeo uses its own definition of property price to income ratio where the property is a “median” apartment of 90m2 and the disposable income is 1.5x the average net salary (i.e. one full time and one part time worker, roughly). On this basis, the US at 3.6x is now only the 92nd most expensive country in the world (something or someone has Made America Cheap Again!”)

Since, 2009, the ratio in conservative Germany has gapped from 3.8x to 9.0x, in lugubrious Sweden from 5.3 to 10.2 and in worthy Denmark from 3.2 to 6.9. There are any number of other examples that you can see for yourself if the link works.

The evidence suggests that legitimate cheap money has to flow somewhere and real estate, with its perceived character of being simultaneously solid and speculative, has proved irresistible all around the world.

The conclusion is that the end of cheap money is going to threaten property speculators everywhere. For that reason it seems likely that central banks will remain reluctant to return interest rates to “normal” average historical levels. The Fed backed off yet again this very week. But if major economies start to overheat and tight labour markets help to force inflation back to threatening levels, then central banks will have no choice but to react.

The case for the continuation of the cheap money/low inflation era remains – the burden of demographics and the unskilled gig economy which is returning some service industries to the labour-intensive days of our ancestors. But that’s another story to which I may return.

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