Five reasons why the London property market is overvalued

If there is one property market around the world that continues to attract the attention of overseas investors it has to be the London real estate market. This is a market which has continued to push further and further ahead despite warnings by the UK government, leading property investors and even the Bank of England. If you take a step back and take off your rose tinted glasses it is not difficult to see why London property is perceived as being overvalued.

Lack of suitable property

Despite the fact that the recent rise in London prices has brought some sellers to the table there is still a distinct lack of quality asset available. Indeed a recent survey suggested that there are eight potential buyers for every one property for sale in London which is causing a very obvious squeeze in prices. Even as investors move outwards from the luxury/central London real estate market there is still very little in the way of suitable stock – which is again causing a squeeze.

Does London have a safe haven status?

It is easy to forget that London/UK offers a very interesting entry pointing to Europe without the problems surrounding the euro and infighting amongst member states. When the UK government decided to retain sterling, rather than take on the now troubled euro, questions were asked but these have certainly been answered. In many ways the UK real estate market offers exposure to Europe without all of the risks associated with membership of the euro.

Quote from PropertyForum.com: “Will a recovery in European real estate prices slow down the UK property market?“

Overseas investors

It is common knowledge that overseas investors are pushing London property prices to new highs with particular interest in the luxury London real estate market. While many experts continue to call the top of the market, ongoing overseas demand seems relentless and there seems little hope of a short-term reduction in overseas funds flooding into the capital of the UK. Indeed the UK government has even flagged the idea of a new property tax which would bring overseas investors under the same rules as their UK domestic counterparts.

Income/mortgage ratio

There is worrying evidence which suggests that mortgages are now been agreed for London properties in excess of five times income. This is especially worrying when you bear in mind UK base rates are currently 0.5% and seemingly on the way up over the next 12 months or so. If investors are overstretching themselves on five times income on relatively cheap mortgage rates they can only expect extreme pressure as mortgage rates eventually move back towards more “traditional levels”.

Buyers have lost all sense of value

The luxury London property market has seen some extreme prices paid for quality properties with rental yields on occasion under 3% and in some situations closer to 2%. When you bear in mind that inflation is currently around 1.7%, having fallen recently, there is very little in the way of real income available from some of the higher end London property investments. This perfectly illustrates the fact that some buyers seem to have lost all sense of value in the London real estate market and could potentially be setting themselves up for a significant fall in the not too distant future.