London calling

I am currently on a fact-finding trip in Europe. January is a perfect time to see London, meet with business leaders and get around without a phalanx of tourists slowing travel. What has struck me most, however, is the cost of real estate. Here in London, prices are far higher than in many other global capitals.

Almost everywhere you go in the western world, real estate is still recovering from the deleveraging that began in the last recession. Not so in London.

This week, I had dinner in picture–perfect Hampstead. I asked about a recently completed real estate transaction in the area. Practically in front of me, down a stone-cobbled street, was a modest four-story, but narrow, home with wooden doors and one parking space. The house, I was told, had just sold for £8 million pounds, or $12.9 million.

Real estate prices in central London and in many of the adjacent residential areas have been climbing, even through the crisis.

After making a quick comparison of the prices of flats and houses to income in London, I found that there seems to be no logic behind the high real estate prices, even if I adjust for the large number of financial organizations based in the city.

The usual rule of spending one-third of income on housing costs doesn’t seem to apply here. Across the board, London’s house prices are huge multiples of income. So what explains this real estate phenomenon?

Well, if you ask who bought that house in Hampstead or this flat in Pimlico, the answer is almost never “a Briton.” I most often hear that it was “a Frenchman,” “a Greek woman” or “a Russian businessman.” So flight capital is coming to London ... but why?

People are certainly not buying up property in London for the climate. It seems that the rest of the world, especially the wealthy of the world, wants to park some or all of their wealth in London for a variety of reasons. They value the stability of the English legal system and the relative safety of the British financial system, which, while prone to gyrations, is still made up of banks with sound capital structures and maintains smooth operations in its investment markets.

Then there is the issue of taxation. While people complain that UK taxes are too high, the country’s tax system is far more welcoming to the wealthy than the 75% income tax rates being imposed in other European countries.

Around the world, money is on the run. And the attempts by politicians to grab as much of it as they can to finance their government spending will be foiled by the fact that we live in a global economy in which money is mobile. Policymakers seem to have lost sight of this fact. Capital can travel and will always be on the outlook for the safest neighborhood.


No forecasts can be guaranteed.

The views expressed are those of James Swanson and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation or solicitation or as investment advice from the Advisor.

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