Wry & Dry

Faintly ridiculous London property market

W&D was attracted to an article by Wolf Richter, that astute, if somewhat cynical observer of investment matters.  The article was about the absurd residential property situation in what is known as Prime London [1].  W&D knows that every reader has a secret desire to own an apartment in Belgravia, so would find a W&D summary useful.

The problem is best explained in the following chart:

uk-boe-house-prices-v-rents-prime-london

Let W&D give you the whisper: if it looks like a duck, walks like a duck and quacks like a duck; there's a very good chance that it is a duck.

And so, in short, London residential property is in a bubble.

What the chart shows is the outcome of those amazingly stupid central-bank policies, Russian-oligarch money and the adjacent City of London financial district.  According to the Bank of England, residential prices in London have nearly tripled since 2005 (as the above chart shows)!

Nice work if you can get it.

But, there's a problem.   Rents in Prime London increased as well, by nearly 40% over the ten years, but that's not nearly as fast as house prices.  

The problem obvious to readers is that if rents do not climb as fast as prices, rental yields fall.  Hello.  W&D has written about this about the Australian property market more times than The Trumpster has.. oh, never mind.

uk-boe-rental-yield-prime-london

A gross rental yield of 3% to 4% is low. Subtract acquisition costs and expenses, and not that much remains.  Landlords still enjoy the tax benefits they get from owning rental property, and they cling to the big hope that property prices will continue to soar for evermore.

But the rental yield in reality is even lower. The Bank of England says that the median number of days it takes to rent out a property has increased to over 50 days. So if you have a vacant apartment and spend two months trying to fill it, during which you receive no revenues but have to pay all the expenses, and then rent if for one year at a gross rental yield of 3%, you’re already in the hole because you get 12 months’ rent to cover 14 months in expenses.

If the tenant leaves after one year, you start all over again with a money-losing proposition.

Gloom.  So, rents haven't risen at the same pace as prices because landlords have run out of potential tenants who can afford goofy rents.  

This will end in tears.  It always does.

[1]  Prime London has Hyde Park in its centre, and includes Mayfair, Chelsea, Belgravia, Buckingham Palace, Fulham, Soho, the West End, etc.  That is:

Prime London