Join our community of smart investors
OPINION

London prices and the Harrison cycle

London prices and the Harrison cycle
November 29, 2018
London prices and the Harrison cycle

The recent travails of the London estate agents would come as no surprise if you shared my daily commute through an area of the capital they now refer to as ‘Nine Elms’; a 17th century designation resurrected by the marketing men to gloss over the fact that it straddles some of the less salubrious corners of Vauxhall and Battersea. The 230-hectare site is home to the new US Embassy, although the US President, who presumably knows a thing or two about property development, described the location as “lousy” and “horrible” – epithets unlikely to find their way into brochures for the adjacent residential developments.

Around £15bn in development proceeds are being poured into Nine Elms, largely from investors in Malaysia and the Gulf States. To my untrained eye, most of the developments look jerry-built, essentially thrown up to generate as much floor space in as short a timeframe as possible. Nevertheless, figures from property website Zoopla show that existing flats in the area are going for an average of £699,609, while many of the newly-built residences will attract upwards of £1m – and then some.

The reality is that many of the flats initially sold off-plan were snapped up by overseas buyers, often simply as a means of safely parking capital offshore, but those inflows have started to dry up, as buyers are being deterred by changes in stamp duty legislation and mounting political uncertainties. Last year, the number of unsold luxury new-build homes hit a record high in London. So, despite the number of cranes silhouetted against the Waterloo sunset, a danger exists that Nine Elms, like parts of Belgravia, will be largely uninhabited once they move out.

You can’t draw too many conclusions on the UK property market from what’s happening in Nine Elms, but we’re obviously witnessing a contraction in property values in the capital – but could this prefigure a sustained pullback in the wider UK market?

The economist Fred Harrison has been credited with calling the global financial crisis, or at least the collapse in the US property market which served as its catalyst. Leaving aside collateralised debt obligations, credit default swaps and unsustainable leverage, Mr Harrison believes the collapse formed part of an average 18-year land cycle – one that has been in evidence for decades.

Theoretically, the cycle can be broken into distinct phases. When the economy is expanding, we should witness rising demand for real estate assets. Because land is finite, supply doesn’t automatically ratchet up to meet demand. The exacerbating supply/demand imbalance places upward pressure on land prices, resulting in speculative inflows and unsustainable price growth, often resulting in a mid-cycle contraction. With prices outstripping wages, property eventually becomes unaffordable for many people. Ultimately, the banks – many of which are lumbered with long-term debt secured against overpriced property – are forced to withdraw lending.