Will Average London House Prices Hit £36 million?

By 2050, just looking at this photograph will cost you £450,000

By 2050, just looking at this photograph will cost you £450,000

There’s a theory in economics, known as Stein’s Law: if something can’t go on forever, it will stop.

This is worth bearing in mind when considering this bizarre piece of piece of property news that appeared on the Guardian’s website over lunchtime. By 2050, projections from the London Central Portfolio investment fund suggest, an average small flat in a ‘prime’ part of central London will set you back, well, rather a lot. To be precise, £36 million.

That grotty two bed in Mile End don’t look quite so bad now, does it?

The fund’s thinking is summed up in a quote from investment director Hugh Best. The average price in ‘prime central London’ – Mayfair, Notting Hill and so forth – already costs £1.5 million. And this price has been growing at 9% a year, which LCP believes to be ‘firmly sustainable’. “They have been growing at that level for 40 years”, Best says, “and we see no reason for that to change going forward”.

It’s worth noting that the £36 million figure isn’t LCP’s own, but an extrapolation from that 9% growth rate by a Guardian reporter. What’s more, we’re not talking average London house prices here: this is strictly top-end stuff.

Nonetheless, this projection looks to be just a teensy bit on the optimistic side. This idea that 9% price increases are sustainable only makes sense if you assume that:

a) the ultra-wealthy will continue to get richer at roughly the same rate they always have;
b) the fashion for chucking this money at piles of bricks in W1 will continue unabated; and
c) no politician will ever work up the nerve to try and stop this ridiculous trend, even as we approach the point at which London contains more empty rooms owned by invisible Russian oligarchs than it does people.

Every one of these assumptions is open to question. And, more to the point, the idea of a small posh flat costing you £36 million, even in 2050, is really, really stupid. So, the odds are, it’s wrong.

Which raises an interesting question. Does the London Central Portfolio believe its own marketing? Because if so that’s worrying, and this story might not be quite the draw to investors that the fund thinks it is. Or does it just think that we might believe it?

Or does it perhaps think that we believe other people might believe it? There’s another idea in economics: the Greater Fool theory. That states that investors will happily buy something at an inflated price today, so long as they think they can sell it at an even more inflated price tomorrow.

This city has genuine housing problems; has, indeed, a genuine housing shortage. All the same, this latest wheeze suggests we might just be entering bubble territory.

Photo courtesy of everita, taken from the Londonist Flickr pool

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Jonn

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  • Michael Smith

    It worries me that an “investment fund” can be so poor at economics. The points you raised are entirely reasonable, but even more odd is that they failed to factor in inflation. £36million in 2050 won’t be worth close to what it is today. Sticking your money in a high interest savings account would also see a dramatic increase in value thanks to the wonder of compound interest. When comparing now with the future it helps to remove the growth the whole economy will (hopefully) experience.

    Also, figures from the ONS suggest that there has been significantly above average growth in house prices compared to other price indicators since 1991. However, before that, house prices merely tracked inflation/wages etc. It’s debatable which of the two “averages” are correct for the market in the longer term (i.e. 100 yrs).

    • Jonn Elledge

      That’s the thing that shocked me, I must say. My first thought on reading the Guardian story is “never give these people any money”, and I’m not exactly financially savvy.