This article was inspired by a friend of mine who has decided to leave London to set up base in Glastonbury. The move was prompted mostly by him not being able to afford to stay and set up a base in London; and partly by him being a hippy and not being able to fit into any of the ‘normal’ systems which you need to be part of to be able to breathe and survive in London, like wearing a shirt and suit and going to work on time.
We had a cursory look at the properties available in Glastonbury town centre, they were priced at around £140,000 for a freehold, and at the bottom end of the scale you could get a two bedroom end of terrace with a little garden for this amount. This was the asking price so with a little hunting and negotiation the price could be brought down to £130k or even £120k. This becomes in the realm of being affordable to the average person. In 2014 the average wage in the UK was £26,500, at this level this property becomes affordable.
Lending normally works at roughly five times your salary, applying this gives you a borrowing level of £130k which means if you can scrounge a deposit from somewhere you could get on to the housing ladder.
The statistics of London property price rises are a little crazy, in the last year they have gone up 11%, the average prices stands at £498,000. This means if you held on to a property last year you would have made £55,000.
The median wage for London stands at £34,473, this means half earn more than this and half earn less than this amount.
Chances are you would be better buying a property in London and going on holiday for the year than working. With a piece of property going up faster than what a person can earn, where is the motivation for studying and working?
And if you don’t jump on the property ladder quickly your purchasing power decreases, what you might be able to afford to buy this year you might not be able to afford the following year.
Of course not every year is a rise, but even if we take a five year period during the credit crunch from 2007 to 2011 London property prices still rose by 15%. It is safe to say prices medium to long term generally rise especially in London.
I’m no artist but I know who Picasso is, I also know he is regarded as a genius and a master, furthermore I also know he’s dead therefore he cannot paint any more pieces. Every piece he has done is one of a kind and will increase tremendously in value as time goes on.
One piece of work he did is known as the Women of Algiers which sold for £116m in New York in 1997, this painting has gone up by 462% in 18 years; roughly 25% per annum, you can understand this. There is no comparison to this piece and with age it will increase in value.
According to Nationwide London property prices have increased by 334% during the same period this equates to an annual uplift of 18%.
You can borrow against pieces of art, I would imagine the rate to be higher than the lending rate against property. I would also say it would be safe to assume the rate will be higher and the loan to value lower given the risks and the specialist knowledge involved. There would not be many lenders in this market, not to mention the cost of insurance which would be sky high.
Bearing these factors in mind from an investment point of view you would probably be better off investing £116m into London property than a piece of rare art.
When you look at the rise in property prices in comparison to a rare piece of art it puts things into perspective and reveals the almost ridiculousness of the London property market.
Commentators and dooms sayers have been trying to point this out for decades, however the market doesn’t run on common sense. Property prices have continued to climb upwards and onwards bucking the stamp duty increases.
What’s behind this?
I believe two main factors.
One is foreign money, about half of the demand comes from overseas. Recently in one year 25% of all transactions in Mayfair were done by Indians from India. There are few places in the world which compare to London.
The other is that London is considered a safe haven for laundered money, which comes in from all over and comes in via shell companies set up in offshore locations. There are still means and ways of achieving this.
There is also the basic principle of money which is continually being printed in huge amounts; during the credit crunch this was done in the name of saving the citizens and rescuing the banks. This means that anything which is physical and limited increases in value as money is printed literally from thin air.
When property prices are rising in this way perhaps now is the point when we should be teaching the next generation not how to work for money, but how to make property go to work for you. Clearly the mechanics of the game have changed, and if you don’t own a piece of real estate in London you might be left high and dry in years to come.