Euro break-up could trigger property crash in London
HOUSE PRICES in London’s prime property hotspots, including Mayfair and Belgravia,could fall by about 50 per cent in the event of a messy break-up of the euro, according to research.
The spectacular outperformance of properties in London’s most desirable postcodes, where house prices are almost six times the British national average, is likely to be unsustainable, according to a report by economics adviser Fathom Consulting.
The report, which was conducted on behalf of commercial property developer Development Securities, concludes that the factors that have driven up prices for prime central London properties relative to the rest of Britain swing into reverse in the event of a messy break-up of the euro.
The report concludes that since 1995, the single most important reason for the outperformance of prime central London properties has been flows of capital seeking a safe haven, both in the run-up to the launch of the euro, when uncertainty was great, and in the past few years as its future has come under question.
Two further factors responsible for driving up property prices have been relative sterling exchange rates, which have made British property cheap generally for non-UK investors, and the performance of the equities market, which is the key asset underpinning the wealth of high net worth individuals.
“A break-up of the euro would almost inevitably produce a significant appreciation of sterling and a collapse in global equity prices,” Fathom concluded, a development that would undermine the wealth of many of the high net worth individuals who have purchased central London homes.
Moreover, once European states reverted to their previous currencies, capital would be likely to flow towards investment opportunities in countries whose currency was weak relative to sterling.
Michael Marx, chief executive of Development Securities, said that the report’s conclusions should serve as a warning to prospective investors.
“If you are investing in prime London residential property, you are taking a view on the euro,” he said. “This highlights the fact that the market is now getting toppy.”
The report, which defined prime central London as nine discrete postcodes including Kensington, Belgravia, Mayfair and Westminster, found that prices for prime properties have outperformed prices in Greater London by 30 per cent over the past three years, and Britain as a whole by 34 per cent.
Properties of this type are unusually affected by demand from non-UK citizens. Using data from the Office for National Statistics, Fathom concluded that while non-UK born residents make up 53 per cent of inhabitants of prime central London postcodes, they account for only 10 per cent of residents nationwide.
Moreover, the study highlights the fact that although in recent years, prime central London property prices have outperformed those of the wider British housing market, they have not always done so.
For example, from early 2000 – as the dotcom bubble burst and equities prices fell – the price of prime central London properties relative to those of the wider market fell significantly. Outperformance only began to pick up as sterling began to fall in 2007, and gained in pace with the onset of the financial crisis. – (Copyright The Financial Times Limited 2012)