Irrational exuberance is a term coined by investment markets which often comes before a market correction. As the term suggests, demand for property and the prices people are willing to pay become irrational with very little correlation to cold hard facts and figures. Yet again we are seeing a raft of articles suggesting that the London property market is overbought with prices overstretched and set for a correction.
So, what are the so-called signs of irrational exuberance and are they as relevant today bearing in mind record low interest rates?
Crazy money
The Guardian reported this week that a property in London changed hands for £79,000 working out at more than £1000 per square foot. The “studio investment” in Clapton, east London was so small that lenders were unwilling to agree a mortgage and it was acquired for cash. It is also believed that the property attracts an annual service charge of £250. Is this one of the first signs of irrational exuberance?
Maximising income from tenants
One alarming fact which seems to be occurring in some parts of London is the charging of more than £100 to let potential tenants see a list of properties. These so-called “appointment making agents” must believe there is enough demand in the marketplace to support such an unusual fee structure. Indeed there are also reports that some landlords are now charging £10 to have a friend stay over in their property. Is demand really that high?
Buy to flip investors
As we covered in one of our more recent articles there have been signs that so-called buy to flip investors are yet again targeting London. There is an argument that they never really left the London real estate market but they do seem a little busier of late. Historically, the last swish of a bull market tail has seen a significant increase in buy to flip investors looking for “easy money”.
Self certified loans
One alarming development of late is the emergence of a company focusing upon self certified mortgages which were effectively outlawed by the UK authorities. This operation is set up in the Czech Republic which would seem to allow the company to bypass UK regulations. The rush to make use of this particular service has seen the company forced to close its doors to new applicants with 4000 customers on their waiting list. If this is true, how did they so easily bypass UK self certified mortgage regulations?
Record mortgage lending
As we touched on above, while UK mortgage lending for 2015 came in at £220 billion (a seven-year high) we are not necessarily looking at like-for-like situations. UK base rates are currently at a historic low which has fed the UK property market with cheap finance. There are also many people now looking to remortgage and take advantage of low interest rates before the expected increase towards the end of 2016/early 2017.
Conclusion
While there is no doubt that historic signs of so-called “irrational exuberance” seem to have materialised again in the London property market, we are not necessarily looking at a like-for-like situation. Record low UK interest rates continue to feed low cost finance into the UK property market and this is likely to continue for some time to come. Are London property prices overextended? In the eyes of many people, they have been overextended for the last decade.