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A Fairy Tale Ending?
Over two billion people around the world watched the royal wedding on
Friday. My hunch is that the overwhelming majority were women (guys
aren't that into fairy tales). I have to admit I caught a glimpse
of the royal wedding as it ended this morning and thought they were a
beautiful couple. Kate looked so poised while William looked a bit
nervous but happy.
The royal couple looks very much in love,
which along with health is the most important thing in life. Without
love and health, all the money in the world is meaningless. Whenever I
look at William and Harry, I'm reminded of their mother and the summer
of 1997. She died a couple months after I was diagnosed of multiple
sclerosis (MS) and while her death was tragic, it helped distract me
from my diagnosis and gain some perspective on life.
Opinions are divided on the royal wedding. Cynics will claim that it's a
major distraction, opium for the masses to divert attention from the harsh reality of austerity in England.
Royal watchers will claim that it's all about tradition and being proud
of the royal family. I'm somewhere in between and look at it for what
it is, a boon for tourism.
But what's really amazing is how fast London has bounced back after the
2008 financial crisis, leading Brett Arends of MarketWatch to ask if
it's the world’s hottest real-estate market?:
I hesitate to use the overplayed word “bubble.” But in the case of London property, it’s hard to avoid.
What’s happening here is absolutely ridiculous.
Markets are being impacted by housing-sales data along with fears
over northern European economies and a stronger Japanese yen.
Look in the window of any real-estate agent here and you think people
have gone crazy — and then you realize that the prices are in British
pounds, and that to convert to dollars you have to add another 60%.
Half a million pounds ($800,000) for a one-bedroom condo with a small
garden on the southern, unfashionable side of the river Thames? Really?
And $2 million for a modest two-bedroom condo in Chelsea?
As John McEnroe used to say at Wimbledon, you cannot be serious.
While the rest of Britain grapples with austerity, falling real wages
and budget cuts, London real estate — super-prime London real estate,
the best of the best — is back in the grip of another mania.
According to an index maintained by high-end real-estate firm Knight
Frank, prime central London prices are nearing and may even be
surpassing the giddy levels seen at the peak a few years ago. The
brokers’ windows tell the same story.
It’s like that whole Lehman thing never even happened.
What’s going on?
“London property is the ‘Swiss bank account’ of the 21st century,” Robin
Hardy, an analyst at London investment firm Peel Hunt, explained to me.
Rich people in places like Egypt, Syria and southern Europe are rushing
to get their money away from the turmoil, and for want of a better
alternative, they are plunking it down in the “millionaire’s playground”
of central London.
“It’s seen as a relatively safe place to put your money if your
objective is capital preservation,” he said. They think money is “safer
invested in an apartment in Sloane Street than in a bank account in
Damascus.”
Foxtons, a high-end real-estate agency, told me that 80% of its sales
this year at its Sloane Square branch have come from overseas buyers.
This is just the latest twist to a story that’s been running for some
time. Gulf sheikhs. Russian oligarchs. Newly rich Indian and Chinese
tycoons. London has become a magnate for the international super-rich: a
millionaire’s playground. Russian money has been flooding in for at
least a decade. One hedge-fund manager here told me London property was a
“laundromat for Russian money.”
You can see it in the fanciest shopping districts, from Jermyn Street and Old Bond Street.
The booms in oil and emerging markets have been very good for prices
here for at least a decade. Great Britain, through generous tax
treatment of foreign nationals, has cleverly encouraged the trend.
A friend of mine a few years ago described how a Gulf sheikh was
steadily buying up more and more of her condo development just north of
Hyde Park. The sheikh liked to come to London for two months every
summer to escape the Gulf heat, and he liked to bring his extended
family and entourage. He didn’t care much about price, and he wanted as
many condos as he could get.
There are other factors at work. London has become the financial capital
of Europe. The giant money machine has spread far beyond the old
financial district of the City of London. High-powered hedge funds and
secretive commodity firms crowd the alleys and lanes of Mayfair and the
towers of redeveloped Docklands. The windfalls have long been seen as a
major driver of property prices.
Housing supply is limited, especially in the best areas. London has tough zoning laws, so there is very little new development.
And you can also throw into the mix low interest rates. A friend
explained how his grossly overpriced home cost him very little every
year, because he is paying just 1% interest on a flexible mortgage.
To hear people tell it here, this miracle will go on indefinitely.
Prices will keep rising skyward. You no longer encounter many bears of
London property. Most have given up.
But there are a couple of wrinkles that should give people pause.
First, you see more and more dark windows. On Sunday I went to a pub
with one of my oldest friends. He described how more and more properties
in central London were simply unused most of the year. You’d look up at
the windows as you walked down the street, and very few were lit up.
A recent study by Knight Frank found that one of the top reasons the
international elite gave for selling a London home was simply that it
was surplus to their needs.
The second concern is that more and more actual British are being
crowded out of the city. Over dinners in the past 10 days, both a London
member of Parliament and a top executive at a fund firm here have
bemoaned the fact that young people can no longer afford to move into
the usual London neighborhoods when they start their careers here.
They’ve been priced out. Many of the middle-class are suffering the same
fate. Ultimately, this simply becomes unsustainable. It will strangle
the city’s vitality.
The third problem is that 1% interest rates will not last forever.
Sooner or later they will have to rise, and when they do, a lot of home
loans will become unmanageable as well as unrepayable. Happy times.
The fourth issue is one that often gets forgotten. In the age of the
Internet and modern technology, the comparative advantages of big,
expensive cities like London are actually in decline. Twenty years ago,
if you wanted to run a hedge fund in the British Isles, you probably had
to do it in London. That is no longer the case. It is a lot cheaper —
and the quality of life much better — if you move out of town.
The fifth problem, though, is probably most ominous: the plunge in rental yields.
According to Knight Frank, while prime London sales prices have doubled
in the past 10 years, prime London rents have risen by less than 10%.
The net result is that landowners are getting a gross yield of maybe
3.6% on average, compared to more than 6% a decade ago. Conversations
I’ve had — with renters and owners — suggest some are getting even less.
Once you subtract all the costs of buying and selling a home,
maintenance, taxes and condo fees, some landlords are making very little
— if anything.
As usual, the defenders of current prices are quick with a rebuttal:
“But people aren’t investing for the yield,” they say. “They are
investing for the capital gains!”Alas for this argument, in a rational market, yields are the drivers of
capital gains. The price of an asset goes up because the current owners
are earning so much money that outsiders want in. The idea that people
will keeping bidding up prices of an asset that makes no money is
quixotic at best.
Will it turn? If so, when? It’s anyone’s guess. But for those living and
working in Britain, the conclusions are pretty obvious. If I moved back
to this country, I would avoid living and working in London if at all
possible. And if I had to be in London, I’d rent.
If I had to live there, I'd rent too but I wouldn't live in London if you paid me all the hedge
fund bonuses in the world! Loved visiting the city but it's way too overcrowded and outrageously overpriced. Blame the "Russian oligarchs"
or the "Gulf sheiks", but at the end of the day there is a lot of hedge
fund money in London that is bidding up prime real estate prices (that's
how hedge fund managers compare penis sizes).
It's ridiculous and the same nonsense is happening in
Canada. I see condos in Old Montreal selling at ludicrous prices. My
buddy out in Vancouver just bought a $2 million home in the outskirts
(modest house; no comparison to his $1 million dollar house in Mont-Royal here in Montreal)
and could have easily made 10% if he flipped it after a month. he tells
me rich Chinese are snapping up properties like crazy so they have have
one foot outside China. Little do they
know they're contributing to the Canada bubble fed by Canada's mortgage monster which will eventually explode.
Whatever the case, I've heard these stories of "real
estate prices can only go up" forever in Greece. Guess what? When people
need to sell, they sell, and that's what is happening right now in
Greece, Spain, Portugal and even in the coast of France (many British
sold their summer houses there for financial reasons). If you're looking
for deals, forget London, you're better off looking at these countries
first. When it comes to London's property market, I fear there will be no fairy tale ending.
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Not much of a pop at all really.
SLV and AGQ (no brianers) have done much better this week if you BTD.
While your article was interesting, your attitude is terrible.
I hope Tyler takes this into consideration and has a talk with you.
Kockupalot
Have you sold SunPower at $20 or are you holding for your pension?
I'd like to keep a track of your astute green investment strategy, not just cherry picking a one-off (probably ramped by Goldmans before they dump the corrupt sham that is the green/renewables industry)
I however, would live in Somalia if I were to be paid all the hedge fund bonuses in the world.
You are well known as an idiot in this forum; don't try to out do yourself.
Yeah, nice try there Selah, when did you get lobotomized?
I get a lot from your articles and want to thank you. Do not let a troll upset your wonderful work. Thanks......
You demean yourself replying to this kind of thing, Leo.
So true BigJim, my apologies.
BigJim, pride before a fall? ....for jibbering about your pompous ego instead of having something useful to say please join Kockupalot in the corner of the class and put on that big pointy hat with 'D' on it ..you belong together
It should surprise no one that everyone that matters always forgets what's happened, otherwise, they wouldn't be able to repeat the mistakes of the past, that have made them all so rich.
It amazes me that people forget so quickly. The price will always go up just because the property is so hawt! These people deserve to lose their shirts. However, I do think that as long as the easy money is in play the prices will go up for now, though even easy money has its limits in real estate. A hint at 'austerity' and tighter monetary policy will spell the doom of these bubbles.
So true. A few weeks ago, I watched this house flipping programm on the BBC where a young couple bought a BASEMENT of a house in london FOR 1.3 MILLION POUNDS!
The basement was what a basement is. It still needed to be "renovated" into a "house".
At the end the total cost was 1.6 million pounds for the little appartment/basement.
All I could think of was "IDIOTS"!
For that kind of money, I could buy a very large villa on the country side over here 15 miles from any big city.
it was nuts to how those people threw away their money.
LA 2006 Redux.
It's a shame you can't short London Property.
Oh well, most overpriced high end property will be available for a couple monster boxes or so of Ag in the not too far future. Gotta' watch out for the tax encumbrance though.