Two convergent themes we’ve been keen on documenting this year are stagnant wage growth and the soaring cost of living.
Needless to say, when housing prices rise inexorably but incomes remain stuck in the mud, the strain on everyday people can become overwhelming as illustrated rather poignantly in “Million Dollar Shack”, a documentary which lays bare California’s housing bubble.
But Silicon Valley isn’t the only place where even the upper middle class are being priced out of the market.
Prices are soaring across the US with the cost per square foot in Manhattan hitting an all-time high in Q3. Similarly, ZIRP and NIRP have driven the housing market into the stratosphere in places like Denmark, Sweden, and Norway. Meanwhile, in China, the massive amount of capital flowing out of the country (courtesy of “Mr. Chen” and his Snickers bars) is still finding its way into already overpriced overseas real estate despite Xi's best efforts to crack down on illicit transfers.
It’s against this backdrop that we bring you the following from Bloomberg and UBS who note that when it comes to housing bubbles, London and Hong Kong are right up there with the "best" of them. Here’s more:
London and Hong Kong are the cities most at risk of a housing bubble as real estate begins to look overvalued, according to UBS Group AG.
The U.K. capital is now the second-least affordable of the 15 urban centers studied by UBS, trailing only Hong Kong, the report said. Price-to-income and price-to-rent values have surged to all-time highs even as real earnings have fallen 7 percent in London since 2007, UBS said.
London risks a “substantial price correction should the fundamentals for estate investment deteriorate,” the report said. “We advise caution.”
Just as PE is minting new landlords in the US, the market in London is being driven by the allure of capitalizing on rising rents:
London house prices have surged 40 percent since the beginning of 2013 because of demand from overseas buyers, attractive rental yields and population growth, the Swiss bank’s global real estate bubble index shows. The Bank of England has asked for more powers to regulate lending to so-called buy-to-let investors, who are attracted by rental yields of more than 5 percent compared with 1.8 percent for benchmark U.K. government bonds.
Here's a bit more color from The Guardian:
Price increases of 40% since the start of 2013 have more than offset losses during the financial crisis and mean that homes in London now cost more than ever before. On Wednesday, the Land Registry said the average price had almost hit the £500,000 mark, with the annual rate of inflation running at 9.6%.
Meanwhile, wage growth has been sluggish, and the price increases have made London one of the most expensive cities in the world based on price-to-income and price-to-rent ratios, the UBS report said.
“It takes a skilled service-sector worker approximately 14 years of average earnings to be able to buy a 60 sq m dwelling; the expense of buying a flat is comparable to renting it for 30 years,” it said.
And here's unequivocal validation of everything we've been saying for years (from UBS' Claudio Saputelli and Matthias Holzhey):
"House prices have decoupled most from local incomes in Hong Kong, London, Paris, Singapore, New York and Tokyo. Buying a 60-square-meter apartment exceeds the budget of most people who work even in the highly-skilled service sector. Loose monetary policy has prevented a normalization of housing markets and encouraged local bubble risks to grow"
In other words, far from promoting a beneficial trickle-down "wealth effect," ZIRP has i) failed to lift household incomes, and ii) precipitated another housing bubble that is now so large and ubiquitous that even the well-off are priced out.
But don't worry Londoners, you can still get a bed under the stairs for £500 a month...
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While it is painfully obvious that London property prices (and now rents) are in an atmospheric bubble, it appears the policy-makers choose to ignore the reality for the average Brit in favor of 'wealth' creation for the few.
As @Alex_Lomax tweets... "I have literally just been shown a bed under the stairs for £500 a month... F You London!"
The ad was posted on site London2let and reads:
One single furnished room available.
We are looking for a friendly, open-minded and outgoing person to join our houseshare in a great period house in Clapham.
We're a good bunch and like to chill out a lot together - not really looking for somebody that just wants to stay in their room. Room comes with a bed.
Bills to be shared - approx £60 per month each. Easy access to local tube stations.
As Alex explains, the room lacked any utilities, but did come with a carton of Daz on the floor and coats hanging from hooks.
I didn't even stay long enough to check if there was a mattress, and the landlord seemed absolutely serious.
I asked him if he was joking and he seemed shocked I'd even asked.
I took the pics secretly when he was making himself a cup of coffee, the cupboard was right next to the kitchen.
I expected a normal single room, definitely not this. I left as quickly as I could.