London house prices at an all-time high

Further proof that the reflationary efforts of policy makers is taking hold comes from London in the form of record high house prices.  The Guardian reports:

Property asking prices in London have broken through the record high set in November 2007 as the drought of homes for sale around the country continues to distort the market. New research out today shows that the average asking price in London jumped 6.5% to £461,157 in the four weeks to 10 October, sailing through the high of £412,731 set in November two years ago.

The survey by the property website Rightmove also shows that asking prices in England and Wales are now higher than a year ago, after climbing 2.8% in the past month.

Back in March, when the global economy was flat on its back, I suspected that policy makers saw only one way out of this mess: another asset bubble.

Their efforts point in four directions:

  1. Increase asset prices. If the assets on the balance sheets of banks are falling, then why not buy them at higher prices and stop the bloodletting? This is the purpose of the TALF, Obama’s mortgage relief program and the original purpose of the TARP.
  2. Increase asset prices. If assets on the balance sheet are falling, why not eliminate the accounting rules that are making them fall? Get rid of marking-to-market. This is the purpose of the newly proposed FASB accounting rule change.
  3. Increase asset prices. If asset prices on the balance sheet are falling, why not reduce interest rates so that the debt payments which are crushing debtors ability to finance those assets are reduced? This is why short-term interest rates are near zero.
  4. Increase asset prices. If asset prices on the balance sheet are falling, why not create Public-Private partnerships to buy up those assets at prices which reflect their longer-term value? This is what Geithner’s Capital Assistance Program is designed to do.

So I lied, there is only one direction the government is headed: increase asset prices (or, at least keep them from falling). Read White House Economic Advisor Larry Summers’ recent prepared remarks to see what I mean. (Summers on How to Deal With a ‘Rarer Kind of Recession’ – WSJ)

The same was certainly true in Britain as well. With share prices up well over 50% and property again at a new high in London, the government has succeeded beyond anyone’s wildest dreams.

Mind you, the real economy is still in a shambles, with manufacturing taking the slowdown especially hard.  But, the employment market is not nearly as dire and the economy seems to be leaving recession.

Things are a lot better in the City than in the real world because the increase in asset prices is a huge boon for the banks. Expect bankers in the City to reap the benefits in the form of record pay packages this year.

Unfortunately, if you are a renter looking to get onto the property ladder, it is going to be rough sledding.

  1. Jake says

    Does this have anything to do with the absolute collapse of the Pound (i.e. are foreigners coming in and buying at a 20% discount even though the price in Pounds is higher)?

    If so, are locals (i.e. Londoners) now completely priced out of the market?

    1. Edward Harrison says

      It could do. There are a number of factors at play. First is the pound. Because London is an international hub, many people from Asia and the Middle East own property there. During the crisis, these buyers were non-existent. Second, London being Europe’s financial center gets a lot of buyers not just from UK finance people but from finance guys from all across Europe and the US (all the bankers from UBS, Deutsche, Morgan Stanley, etc etc – they all live in London’s tony districts like Kensington, Chelsea, Notting Hill) and right now bonuses in finance are looking good. Third is interest rates. The FSA is talking about cracking down on reckless lending but the low interest rates are increasingly being combined with near 100% mortgages again. This makes it easier to leverage up for creditworthy buyers. Finally, there is a dearth of property on the market at the moment. This is causing a lot of gazumping (a British term for putting in a higher bid just to get the property in a bidding war)

  2. HypeSkeptic says

    There is a property bubble at the high end of the market, with all sorts of silly shenanigans among competing buyers of £1m-plus homes. It’s all cash/bonus/overseas money. The rest of the market is doornail dead. Overall UK house prices are expected to come down 3% next year. Real people are trying to pay down debt, can’t get home loans, losing their jobs.

    Dunno about the real economy leaving recession. It seems to be on life support (QE). Withdraw the Bank of England’s funny money, or tickle interest rates up a whisker and we’ll be double dipping before you can say ‘give that *anker a bigger bonus.’

    1. Edward Harrison says

      That’s my understanding as well. This is really just a sign that overseas buyers are returning and the City is doing well because of large bonuses. In the real world, credit is still being restricted and buyers at the low-end are finding it hard to get on the property ladders.

      Prices in the UK are still far out of alignment with historical price-to-rent and price-to-income ratios.

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