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London Property Market


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Like a lot of property markets London property has enjoyed an incredible run. Operative factors seem to be:

-Foreign interest with a lot of Asian buyers treating London property as a bank 

-Affordability helped by very low interest rates (most mortgages are variable in the UK with only short term fixed e.g. 5 years available

-Housing shortages as it is difficult to get permission to build new houses to meet the demand

-Banks easing lending requirements as they become greedier and complacent and want to take advantage of the housing boom

-Everyone overstretching to get on the housing ladder because of FOMO and believing half-truths like "Property is always a good investment" "House prices always go up" "Paying rent is throwing money down the drain etc"

-Government schemes that aim to increase affordability but have the unwelcome side effect of increasing prices for new builds (the most popular requires a 5% down payment with the government providing the rest of the funding for the deposit) 

 

And of course the new one is inflation. Rising rents make yields more attractive and if accompanied by rising wages will increase nominal affordability. 

 

Obviously interest rates are slowly starting to creep up which will have some impact on affordability. But it is difficult to imagine foreign interest diluting so long as prices continue rising and also difficult to see supply shortages ever getting resolved. And there is a lot of political pressure to keep house prices high. 

 

Anyone have any further insights on this? 

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Brexit and Ukraine crisis has and will push the inflation up sharply and in turn put a severe dent on affordability. Interest rates will move up (already 3 rate hikes done by BOE) making mortgage payments difficult for homeowners. Many homebuyers are still on interest only mortgages, and they will be squeezed severely. Though there is pressure on the govt. to keep home prices afloat, there is higher pressure to bring down inflation.

 

In last few years, there has been a short supply of inventory in the markets - many sellers stayed away from selling due to rising prices as they didn't want to give up any upside. As demand falls due to rising interest rates, one may see a sudden supply coming the market as sellers rush to capture the higher prices.

 

Not sure if there will be any sharp fall in the prices, but doubt that the run will continue.

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Generally I think you should never bet against London or New York etc. in the long-term.  And you know a lot of the good points already.

 

There are some decent UK-listed REITS as well in all the usual sectors, and some with reasonable valuations.  Like in the US, some of the small-caps are being bought out by Private Equity as the listed ones are sometimes cheaper than the privately-held.

 

Potential problems - there is occasional talk about introducing a Land/House tax (as, like everyone, the UK has borrowed a lot) which might dent your profits, though as long as it's at a reasonable rate it may just be absorbed.

 

 

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Just to add a different take.

 

We own a long lease in Knightsbridge, and have had it for many years. Lease payments are paid up front, and rich Russians have been very good tenants. Demand is stronger than ever, and we will very likely get a 10-15% rent increase if we agree to re-let on a 2–3-year term. Quality counts.

 

Whatever we put into London, is ‘safety’ money. As long as we only buy quality, we will always have a liquid market, no matter the worlds problems; liquidity at a discount/premium according to net money inflow at the time. Could have done the same thing in Vancouver/Toronto; we don’t, because we already have a ‘safe’ Canadian base, and prefer the diversification.

 

‘Safety’ money is almost never going to be the marginal money subject to rising mortgage rates, inflation, etc. Mortgage servicing is typically used to reduce net income to zero, and avoid taxes; not to purchase the property itself. However, foreign based safety money will drive up the price of the RE, and it will be subject to penalty if the property is not subsequently let.

 

Invest via a local, and opportunities present. The business decision simply becomes whether similar quality RE in a secondary city, over the same time horizon, is the better choice. Midlands or Aberdeen, property/opportunity specific, vs London. Also, a lot less chance of digging a hole and hitting a long-lost Roman in a Birmingham - than there is in a London!

 

At the practical level, location is really decided by objective.

To get wealthy, invest in the secondary cities. To stay wealthy, invest in the highest quality London RE you can afford. 

 

Different POV

 

SD

 

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Yeah I guess my main concern is what a secular rise in interest rates could do to the London property market as you could then get hit by the double whammy of falling prices AND rising mortgage payments as it is not possible to get a 30 year fix like it is in the USA. 

 

Stock market I am less worried about this possibility because a falling multiple will be offset by higher EPS over time and I'm not buying stocks using leverage.

 

I'm primarily looking at London property because Id like to buy one day (at the right price) not necessarily as an investment 

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