The price of property in London is highly overvalued, due to demand exceeding supply by a large margin. In the capital, the cost of housing is becoming increasingly unaffordable. The average cost of housing is 14 times higher than earnings. This has forced some workers to move out of the capital. This has had numerous implications e.g. workers may have to travel further to their workplaces, thus resulting in more air pollution.
It is a well-known fact that the economy in the South-East of England is much better than any other area in the UK. Residents from other areas of the UK have traditionally moved to London to secure a job. However, increasingly high accommodation costs may deter some workers from moving to London, potentially limiting economic growth (for certain industries where workers are in short supply.)
High Prices Due to Excess Demand
As already stated, this ultimately is due to there being excess demand for housing in London. Building new accommodation takes a long period of time, so supply tends to lag far behind demand. Furthermore, space within London is highly limited, and councils are reluctant to allow firms to construct on “green belts.”
Many non-British citizens tend to purchase properties in London, often in exclusive areas such as Kensington & Chelsea. A relatively small, 3-bedroom flat will often sell for several millions of dollars in these areas. Purchasing property in London is an investment, and many people see it as a relatively secure investment, as housing prices have risen for several years. There has also been worries that properties are being purchased in London to launder money.
As a lot of the properties in London are used as holiday homes (in certain areas), they spend most of the year unoccupied. This has angered many Londoners, and some want the government to take action. As of April 2015, it was reported than London had 80 billionaires, with a combined net worth of around $400 billion. In fact, more billionaires reside in London than any other city in the world.
Implications on The UK Economy
Rising property prices can in fact support the economy, as property owners feel more confident due to the rising value of their property (this is known as “wealth effects”), causing them to spend more. However, unaffordable housing in London will inevitably have negative implications. For example, workers (and perhaps some firms) are being forced to move out to other areas. Certain analysts may see this as beneficial for the UK economy, as the UK’s GDP will be more spread out (across the UK.) But it should be noted that there are advantages to having an economic hub (where much of a country’s GDP is generated) e.g. lower transportation costs for resources etc.
London Property Bubble Could Burst
In order for the housing bubble to burst, there would need to be either a sharp increase in supply, or a dramatic reduction in demand. If the government was to provide subsidies to firms to build accommodation in London, prices would be forced back down. The government could also impose a price ceiling, although this system would be highly unpopular amongst current landlords & home owners. It could also lead to the creation of a black market.
It has been reported that house prices in London & the UK would fall if the UK left the EU, due to falling demand for UK properties from overseas buyers. An economic crash is another potential demand-side cause that could result in a reduction in London house prices.
Ultimately, it remains unclear if the “housing bubble will burst”, but purchasing real estate in London is certainly not a risk-free investment. The implications of lower house prices on the UK economy are also unclear.