What Could Possibly Go Wrong? London’s Property Tipping Points (Part 2 of 3)

DarksideLogo5If you missed our look at the exceptional confluence of events that has helped the London property market to boom, see Part 1. If you’re already up-to-date, prepare for the dark side of the story: what could possibly go wrong?

It’s impossible to say exactly how, when, or how quickly London’s current property boom will come to an end. It does seem likely, however, whether in a year or a decade, that the time will eventually come. Old hands in the London market can remember a time and a place, not so far away, when they were not in favour. And they know that it will happen again. All things, after all, are cyclical.

In the immediate future, as campaigning for the 2015 UK general election gets into full swing over the coming months, analysts fear that just a single misplaced policy announcement could be enough to panic existing and potential investors across the world. The big issue is political uncertainty, specifically in anything relating to the tax regime, appealing to overseas capital and the immigration rules.

Meanwhile, the prospect of a referendum on Britain’s EU status – something the Conservatives have promised voters if they stay in power come May – is another significant political risk. Anything introducing uncertainty, and the EU issue has the potential to do so on a massive scale, is a worry both for the market and for investors.

But what are the specific tipping points that could herald the end of the situation we are currently experiencing?

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FIVE POTENTIAL TIPPING POINTS:

WHAT? Ultra-low interest rates

HOW? Many countries’ interest rates are at historic lows. As a result, mainstream investment classes are generating low yields. Fund managers who need to deliver certain levels of performance to their investors are searching desperately for assets that will produce higher returns. With London property averaging yields of 5-6 per cent, the sector looks very attractive. As a result, cash is pouring into property assets. But this trend is not expected to continue indefinitely. As countries begin to consider raising interest rates in the coming years, other investments are likely to start looking more attractive again.

HOW QUICKLY COULD IT CHANGE? Years to decades.

. . .

WHAT? Currency effects

HOW? After the global financial crisis, the pound became relatively cheap compared with property buyers’ domestic currencies. Between 2008 and 2013, sterling fell by nearly a quarter against the dollar and by 11 per cent against the euro. As a result, London property prices that looked eye-watering to locals seemed perfectly affordable to foreign buyers. But this trend has already begun to wane. The pound is appreciating once more, up 5 per cent against the dollar over the past 18 months and 8 per cent against the euro. This has taken some heat out of the London property market. For example, in March 2013 a £1m London home cost 1.86m Singapore dollars; today that is S$2m. If this trend continues, investors whose assets are denominated in other currencies could switch to other property markets.

HOW QUICKLY COULD IT CHANGE? Weeks to months.

Read the rest in the final installment, next week…