These charts show that London is in a housing bubble and it's going to pop any second
Bill O'Neill, head of the UK investment office at UBS Wealth Management, said in the UBS Global Real Estate Bubble Index that London property prices have surged so quickly that they're now more or less completely detached from earnings.
This may not sound like anything new but for the first time in a while, UBS laid out exactly how crazy London property prices are - even if they're not at the highest price per square footage in the world.
Take a look at this chart:
And compared to Europe:
London is highest-ranked in terms of bubble risk. This is mainly because the price-to-income and price-to-rent ratios that have surged to all-time highs and are effectively becoming detached from how the amount that people earn.
In other words, prices are rising too fast and wages are not rising fast enough to catch up. Eventually, property prices will be so high that people won't be able to afford to rent or buy.
These are the startling statistics that stand out:
- In London, average real dwelling prices have soared by almost 40% since the beginning of 2013, more than offsetting all the losses triggered by the financial crisis.
- It takes a skilled service-sector worker approximately 14 years of average earnings to be able to buy a 60-square-meter dwelling; the expense of buying a flat is comparable to renting it for 30 years.
- London house prices, in real terms, are 6% above their previous 2007 peak despite nationwide prices having declined by 18%. The decoupling of the London real estate market from the rest of the UK is even more drastic considering that, in the same period, real average earnings fell by 7% both in London and UK-wide.
When it comes to buying a property UBS warns that London's house price surge is so out of control that it is now "decoupling" from the rest of the UK market, meaning its price rises are just in a whole league of their own.
"A number of factors have stoked demand for Prime Central London housing, including a search for safe havens, global geopolitical risk, high property valuations in Asian cities, relatively alluring yields on buy-to-let investments and ongoing population growth," said O'Neill. "We advise caution given the risk of a price correction should the fundamentals for real estate investment deteriorate."
Britain's property price rises are purely down to a traditional supply and demand gulf.
Latest data from the Office for National Statistics show that the average price to buy a property in the UK is at £284,000. Meanwhile, the average price in London is at £522,000.
The Confederation of British Industry (CBI) warned last year that 240,000 properties need to be built annually, in order to accommodate rising demand across the country. Unfortunately, over the last 14 years, over 200,000 homes have been delivered annually in just four periods.
Not enough houses are being built to sate demand and earnings are not rising fast enough to accommodate the surge.
Basically - be prepared for a hefty pop.