During housing bubbles, shocking statistics can prove just how bad things have become in the market.
In the 1980s, during Japan’s bubble, the land around the emperor’s palace in Tokyo was reportedly worth more than the whole state of California.
In Britain today, the value of London property is higher than Brazil’s GDP, says estate agent Savills.1
Now, people are wondering what will burst the housing bubble, and consequently how far prices will fall.
Foreign money
London house prices have been fuelled by foreign investment. Almost 70% of property sold in central London in the past few years has gone to residents outside of the UK. For the whole of London, this number is about 20%.1
The biggest group of buyers is said to come from Russia, with one in five property sales worth £10m or more coming from there.1
For those who are not British citizens, there is a generous tax system for buyers. For rich Russians, putting money into London may be favourable to keeping it in Moscow.
It is not just Russian’s buying into the market. The Eurozone crisis has brought a lot of money into the UK.
Oil prices
A lot of wealth driven by $100 per barrel oil has gone into the London property market.
With the decline of oil prices, there is a lot less money going around. Furthermore, President Putin is attempting to get Russians to bring their money back home.
Additionally, Britain has also been made less of a safe haven for foreign investors, due to sanctions.
There has been a general sense of anger towards the area of London dominated by second homes, adding more pressure to tax wealthy and foreign property owners. Depending on the result of the general election in May, there may be a mansion tax introduction.
This is causing overseas buyers to think twice about property in the capital.
Quantitative easing
The London housing market could also experience pressure from the recent move from the European Central Bank’s (ECB) decision to introduce quantitative easing (QE).
Money Week’s John Stepek expects this to affect the value of the euro. The currency has already dropped against the sterling. However, JP Morgan’s Strategic Bond Fund’s Nicholas Gartside believes that it could decrease by a further 10%.1
This would make London homes more expensive for Eurozone buyers. Importantly, the ECB has also begun printing money. Signs of a wider recovery could see money leave London and go back into cheaper Eurozone assets.
Dropping prices
For now, interest rates seem likely to stay low. Also, whoever wins the election will need to keep prices high. The British housing market is considered too big to fail.
It is thought that UK property prices will remain the same as they are currently; particularly steady in London, and rising slightly outside of London.
Money Week’s Merryn Somerset Webb believes now to be a good time to downsize from the capital into the country.
However, this could be an idyllic viewpoint.
Rarely, overvalued markets remain static. They are more likely to jump from high to low.
Paul Hodges, demographics expert, predicts that prices could fall by a lot more, as much as 50%.1
1 http://moneyweek.com/the-oil-price-crash-and-european-qe-will-pop-londons-property-bubble/