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London’s Forever Blowing Bubbles

There’s a lot in the press right now about London’s housing bubble. It’s no secret that property prices in the capital have been rocketing. Most of press stories out there seem to be blaming rich Arabs or Chinese who are allegedly snapping up the whole of West London. If you believe the papers the bubble is ripe for bursting.

I’ve got a vested interest in the London property game so I’ve been taking interest in all this bubble chat.


image source

In particular I was reading this article on the FT (link is a search result for those that don’t subscribe) which had a few interesting statements in it that I’ll consider below.

growing concerns about a property bubble in London where investors, both international and domestic, have been piling into the market in search of yield they cannot find in other asset classes.

If the investors find the yield they need/want then what’s the problem? Personally I’ve looked at a few opportunities and not really found the yields on offer generous enough (at current price levels) to tempt me to increase my property holdings.

With interests rates so low, anything that yields 4-6% now seems to classify as high yield. Any asset that returns a steady (high yield) income and has a capital growth profile over the last 28 years that looks like this (chart below) seems like a pretty safe bet right?

Historical UK House Prices

source: Office of National Statistics

Of course the chart above looks lovely for us property owners but if this current surge in prices is being driven by the search for capital gains then that’s a different matter. If the boom is funded on promise of capital gains then we are likely headed for another short term crash.

In the post credit crunch world I suspect there’s a hell of a lot less people around with mortgage debt that they shouldn’t really have (i.e. can’t really afford if prices fell). Those that survived post crunch can now probably afford to lose 20-30% in another crash. With lending now [allegedly] more stringent the investors creating this bubble should be good for their repayments.

the cost of a typical home in the capital being £362,699 – more than twice the level of the rest of the UK when London was excluded

I always find it strange when this type of statistic is given as evidence of the London property bubble. What never gets mentioned is that London might as well be a completely different economy to the rest of the UK. I’m not saying it is right, I’m not trying to start a north/south debate, I’m just calling it as it is.

I work in London and live roughly 65 miles outside the capital. I own properties both inside and outside the capital so I know first hand just how different the two markets/economies are.

I can easily see how and why prices inside the capital are twice the price of those outside. If I were to resign from my job tomorrow I am pretty certain that in order to get a local job (i.e. not in London) I’d be staring down the barrel of a very significant pay cut, quite likely in the region of 50% as it happens.

There is a another interesting revelations from Susan Emmett at Savills who states:

What we think is going to happen is people will start leaving London in search of better value.

Damned right, I did it 4 years ago! If people have got half a brain they’d do what we did. Move outside of London but still work there until you can afford to not have to. And whatever you do never sell your London property!

This whole early retirement/financial independence/money tree thing is all about reducing expenses and increasing income. Living outside London but working inside is the perfect way to super charge the whole wealth creation process. However saving on housing costs isn’t the only benefit of rural life.

Since moving out of the smog (alright it is currently smoggy up in the shires too!) we’re saving a packet each month on all sort of things that are cheaper outside of the smog (e.g. meals out, tradesmen, good quality organic food, car repairs, cinema tickets, entertainment etc etc). Pretty much everything that isn’t bought from a multi national company is far cheaper 65 miles up the road.

The longer I can have my income inside London’s bubble and my expenses outside the better.

Whether the London housing bubble bursts or slowly stops inflating (as the yields disappear via price increases) I don’t really care. In the long run I’m convinced this split economy will mean that at the very least my London property will continue to offer me a decent historical yield, no matter what the capital value.

{ 14 comments… add one }
  • ermine April 4, 2014, 1:03 pm

    > If the investors find the yield they need/want then what’s the problem?

    I discovered the problem in 1988 🙂 Civilians can’t really afford to live there. I was born and grew up in London, I’m glad I went to university there because that was London’s a fantastic place to be young in and I could afford it then. Some things don’t change – rich Arabs were blamed for rising prices then.

    I have the suspicion that one day London will secede and become a city-state like Singapore or Hong Kong. I’m hanging on to my birth certificate and see if I can get dual nationality.

    • Under The Money Tree April 4, 2014, 2:06 pm

      The economic divide between London/Non London never ceases to amaze me.It’s be interesting to see the stats of the two economies side by side and see what would happen if it did become a city state in terms of tax receipts v expenditure.

  • Monevator April 5, 2014, 9:42 am

    This is a live issue for me. Having urged all my friends to buy in the late 1990s when I had no secure money (freelancer!) and then bottling out of buying on house price to earnings fears in 2003/2004 when I could buy, I now find myself in my 40s and “homeless”… If I’m going to get a cheap mortgage and pay it off in reasonable time, then my window is closing I think.

    I’ve toyed with leaving London for years. I like it but I can’t afford it. I have plenty of friends here, but I probably lose 25% of the pool to emmigration to the shires every year for the reasons you state.

    I’m curious, where would you buy outside of London, and where do you think the cut-off/value starts? I’ve friends in Brighton and love the sea, but it seems to be inflated by London money.

    I can easily get by on coming into town twice a week, so I could go up to an hour away. I value quality of life though. I would add that I like bohemian interesting people as a caveat on where I can live, but given many of those have been driven out of London that doesn’t really matter. I do like the countryside a lot, but unfortunately my preference for hills and sea means Wales, Cumbria or Scotland AFAICS, which breaks the one-hour rule, although the South Downs isn’t a bad substitute. That breaks the “not inflated by London” rule.

    And around and around I go. 😉

    I’m pretty good with equities… 😉 I’m not bad at judging economies. But I’ve been a numpty with property, probably because I moved to London young and I like to buy cheap and it hasn’t been cheap since the mid-90s!

    • Under The Money Tree April 5, 2014, 11:23 am

      Where to buy? Well we looked south east and south west and didn’t really find massive value. We had friends in Brighton too but as you state it is silly money there. We ended up sort of between Colchester & Ipswich right on the Essex-Suffolk border. Nice and rural, excellent value property with lots of nice (and a fair share of tacky) costal places nearby. Head slightly more inland towards Sudbury and Bury for more hills and even better value.

      We were really unsure about moving out but it was the best thing we ever did. Our only regret was not doing it sooner.

      Right. Without wanting to rub salt into the wound…..I’ve just got back from a 140km cycle around the lanes and we’re about to head to the coast for a long walk followed by a country pub meal. Days like this (and the promise of one day being able to do this everyday) are what make the commute worthwhile.

      • Monevator April 9, 2014, 9:43 pm

        Thanks for this extra thoughts… I actually read them on the day, but was soon drawn into Rightmove and then lost to the world and forgot to reply!

        Early intelligence gathering suggests Colchester can be a bit tasty at night! 😉 I suppose a recce is the only way to find out for sure.

        Countryside sounds bliss!

        • Under The Money Tree April 10, 2014, 7:58 am

          Colchester. Despite living pretty close by, we rarely venture inside to be honest. It’s much like any other UK city really – same shops, usual amenities and most likely offers a disturbing picture of humanity @ 11pm on a Saturday evening!

          Almost all of our ‘entertaining’ is done in pubs/restaurants in the surrounding area. B&Q is about the biggest draw ‘in town’ for me these days! If you’re a London Bar bug it may be a bit of a culture shock. However if (like me) you’ve reached the age when you like your beer brown then there are plenty of good watering/eating holes to be found in the region.

          Wivenhoe might be worth a look if you like an alternative atmosphere. It attracts a lot of artists/writers and the area around the harbour has a great end of the road feel to it despite being v.close to Colchester.

          • Monevator April 12, 2014, 8:17 am

            Funny you should mention Wivenhoe — it has come up in my research quite strongly. It even passes the “Google Mumsnet” test. 🙂

            What are the trains like late at night out of London? Fairly safe or a violent roulette wheel?

            (Yes, I’m one of those classic Londoners who has lived near the “front line” of various riots but is perturbed by quiet village squares in the country with three bored lads singing old Oasis songs at 7pm…)

            Thanks for the thoughts!

          • Under The Money Tree April 12, 2014, 8:26 am

            The late night trains are absolutely fine……they’re generally just full of insurance guys falling asleep into their Burger Kings! In fact I can show you here exactly what they’re like!

  • theFIREstarter April 6, 2014, 8:21 pm

    That must be one long commute! I take it you can get a pretty direct train in then? My commute is about 75ish minutes door to door, so 150 minutes per day, which is pretty painful enough as it is and I only live about 25 miles away.

    I can see why people want to live in London to avoid that, and if you are
    younger get all the other social, entertainment and other benefits of living right in the thick of things.

    But for me it’s just not worth the money, and I prefer a slightly gentler pace of life right now anyway.

    Sounds like you’ve done very well for yourself to own a slice of the London property pie, I don’t think I’ll ever be able to own anything there, I’ll be looking up North for my first rental property I think!

    • Under The Money Tree April 7, 2014, 8:04 am

      It’s an intercity train to my journey looks like this:
      – 5 min drive to station (15mins if i cycle)
      – 1 hr on the train
      – 5 mins walk to the office

      Factor in a bit of time waiting for the train etc and it’s around and hour and a half each way.

      Being an intercity train however means you get comfortable seats and a table. I tend to use the time to read, research investments or work on my side hustles 😉

      • Ben May 10, 2014, 12:25 pm

        I left London for Montreal. It’s 25 minutes cycle to work along a canal. Forget London it’s a mug’s game. Perhaps you don’t have kids.

        • Under The Money Tree May 10, 2014, 3:14 pm

          Hi Ben,
          A 25 minute cycle commute sounds ideal to me. My plan is to use London and the earning power I have there to enable me to reach full retirement much earlier elsewhere.

    • Ben May 10, 2014, 12:26 pm

      All property gains come from the next generation. It’s not something to celebrate.

      • Under The Money Tree May 10, 2014, 3:28 pm

        Hi Ben,
        I fully intend to pass down my property to the next generation. No doubt the tax man will take a fair chunk (which will also be spent on the next generation too). I’m not really sure what your point is?

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