UBS got it wrong: There’s no such thing as a London house price bubble

Charles Curran
What bubble? UBS' analysis was wrong (Source: Getty)

Is London’s residential property market in a bubble? UBS seems to think so, after its Global Real Estate Bubble index suggested the UK's housing market is on the brink of a crash.

But has it got its facts right? After all, the devil is really in the detail - and this was put together by a couple of analysts living and working in Switzerland.

In the report, UBS suggests the London price-to-income (PI) ratio - its key benchmark for a high bubble risk, which it defines as “the number of years a skilled service worker needs to work to be able to buy a 60 sq m dwelling near the city centre” - is 14 years.

Read more: Bubble bubble housing trouble? London's property market's on the edge of a crash

This is a very subjective starting point for a city as large and diverse as London, with huge house price variation within one street, let alone one borough.

Those findings deviate from those of the Greater London Authority (GLA), which in February concluded that the median PI ratio for Central London was 12.15 years; making London cheaper than Paris and Singapore and on a par with New York.

If you take Croydon (with average commute times to London Bridge of 18 minutes), the PI ratio drops to 8.49, less than Sydney, Vancouver or Amsterdam, but of course other areas are far higher - Kensington and Chelsea at (39.85) and Westminster (23.57), which is part of what makes London so attractive.

UBS chose data showing average earnings for a “skilled service worker” as £29,587.50. That’s at odds with the ONS data, which in December last year suggested the annual wage for people working in inner London was £34,473. This figure is 16.5 per cent higher than the UBS salary assumption and crucially therefore has a significant impact on the PI ratio, upon which the whole basis of their conclusion that London is in bubble risk territory relies.

We were surprised that among their data contributors we found, which took data from “662 entries” provided by London residents. To put this in context, there were 76,426 London sales according to Land Registry from November 2014 to July 2015.

UBS also looked at the price to rent ratio, concluding that “the expense of buying a London flat is comparable to renting it for 30 years”. That misses the effects of inflation on debt, the lack of an asset at the end of a mortgage repayment and anticipated inflation on rental prices.

While the UBS report does look at mortgage balance vs GDP, it does not account for other household loans.

Perhaps a more interesting perspective is provided by McKinsey, which in February published research showing the UK household real economy debt vs GDP has reduced by eight per cent from 2007 to 2014.

We’re not suggesting the UK does not have a significant debt burden, but it would appear that while mortgage debt as a component of household debt in increasing, overall there is a downward trend in household debt.

From where we’re sitting and with our knowledge of the intricacies of the London property market and ability to drill down and access data from reliable on the ground sources, calling a “bubble” seems a sensational claim, guaranteed to grab the headlines, but without foundation for those of us on the inside.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

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