Real Estate Market UK: Development of prices in London

INDEX

LIST OF FIGURES

LIST OF ABBREVIATIONS

1 Introduction
1.1 Problem Definition and Objectives
1.2 Course of the Investigation

2 Influencing Factors
2.1 London's economic history
2.2 Economy in Europe
2.3 Demography and Migration
2.4 Olympia 2012
2.5 Economic Growth in London

3 Opportunities and Threats
3.1 Investing in London's real estate
3.2 Real Estate Bubble

4 Conclusion and Outlook

REFERENCES

FIGURES

LIST OF LITERATURE

List of Figures

Figure 1: Real House Prices

Figure 2: “Immobilienuhr”

Figure 3: Population of the UK

Figure 4: Age Distribution

Figure 5: Children per woman

Figure 6: London's migration

Figure 7: London and UK GDP growth

List of Abbreviations

illustration not visible in this excerpt

1. Introduction

1.1 Problem Definition and Objectives

Rental growth in London is rising at the fastest pace in 18 years.^[1] First-quarter sales grew 41% this year. As a result of this tremendous real estate sales increase, there is an eminent shortage of real estate,^[2] which leads to price explosions in this sector.^[3] Only in October 2006 the prices climbed about 2.1% which is a 12-month-increase of about 25%.^[4] Renting a six square metre apartment in Notting Hill costs about 800 Euros per month. Agents advertise with slogans like “tiny, but trendy” and say that these apartments would be “ideal for someone with an active social life outside”.^[5]

A property which cost £ 100,000 about 30 years ago would today cost about £ 3.473 million,^[6] which translates into a total growth rate of 3,473%.

The goal of this working paper is to figure out why there is still such a high demand for real estate in London, even it is one of the most expensive cities in the world. Furthermore this working paper wants to show external aspects which drive the prices, and opportunities and threats which come along with this price boom.

1.2 Course of the Investigation

After having shown the problem concerning real estate prices in London, Chapter 2 presents factors that influence or have influenced the London real estate market and the European economy. This chapter will show the economic development of London starting at the formation of London, the political and economic growth, and the current situation with London as one of the biggest finance conurbations in the world. Secondly, the current economic development in Europe will be taken into account in order to present trends that influence Europe as a whole. Thirdly, the demography of Great Britain and London will be analysed for the purpose of finding changes in the workforce and in demand for real estate. Fourthly, an important factor concerning the demand and the prices of real estate, as far as economic changes and attractiveness of London will be taken into account, the Olympia 2012 in East London. Chapter 2 will end with the present situation and a forecast of London's economic growth.

Chapter 3 shows opportunities and threats of an investment into the London real estate market. Subsequently, the aspects against investing into this market will be analysed, based on the thesis that there is a real estate bubble in London.

The points of this working paper shown above will lead to a Conclusion and an Outlook in Chapter 4.

2 Influencing Factors

2.1 London's economic history

London was founded in the 1st century and became Capital of Britannia in the 2nd century.

After London was totally destroyed in the 5th century, it was rebuilt in the 7th century and became Capital of Britannia again in the 11th century. In 1215 the first mayor was elected democratically by the corporations of traders.

As a result of the reformation in 1535 and the subsequent reallocation of ecclesiastical assets, an era of economic growth began in London and the city became a leading trading town.

In the 16th century, London's economic growth was accelerated because of the foundation of the first trading companies and the Royal Exchange, Britain's first centre of trade.^[7]

From 1664 to 1666 there were three bad years for London, which reduced the population significantly. From 1664 to 1665 about 70,000 people out of approximately 200,000 died because of the Great Plague and in 1666 the Great Fire of London destroyed about 13,000 houses and 89 churches. The consequence was that the rich population moved to West End and the poor moved to East End, next to the harbour. At the end of the 17th century, London became the most important financial centre in the world.

During the Victorian Age, London expanded rapidly. This was possible because of the high amount of trains and underground trains, which were built up to the outskirts.

According to a population census, London was the biggest city in Europe in 1851, when the Great Exhibition took place there.^[8]

London was partly destroyed in the Second World War. From then on, the population of London is changing: Many British left London and London's population was decreasing. Since the 1950s, London has a high immigration rate, especially from former colonies. Due to the high immigration rate, today's population of London is multicultural and increasing.

Today, London is said to be the richest city in Europe and the finance intersection between New York and Tokyo. Due to the diversity of jobs and the about 20% higher salaries compared to the rest of Britain, London is a very interesting place to live or work.^[9]

2.2 Economy in Europe

According to the property clock of real estate^[10], London is in the phase of accelerated lease price growth. London is the first European city that reached this level, but the figure shows that the trend of the whole European market follows London, in some countries faster then in others. According to consensus estimates of leading financial institutions, the current economic growth in Europe is about 2.7% and still growing in the coming years. The European index of lease prices also shows an upward trend, within the last year it has grown by about 5.8%, which implies a general positive trend in Europe. Each of the index cities^[11] showed stable (15) or even growing (9) top rents. London had the third highes growth rate, at 16.7 percent. In the first three quarters of 2006, London considerably contributed to the total sales volume of the 24 index cities with about 8.1%, as a consequence of a 19% increase of London's total sales. The vacancy rate of the index cities is at 8.4%, London is with 5.9% significantly below average.^[12]

2.3 Demography and Migration

Due to the fact that fertility rate and the mortality rate are declining, the UK is an ageing population. This has led to a decreasing proportion of the population aged under 16 and an increasing proportion aged 65 and over.

In every year since 1901 until the mid-1990s, with the exception of 1976, there have been more births than deaths in the UK and the population has grown due to natural change. Since the late 1990s, although there has still been natural increase, net international migration into the UK has been an increasingly important factor in population change.

In mid-2005 the UK had a population of about 60.2 million people.^[13] The average age was 38.8 years, an increase on 1971 when it was 34.1 years.^[14]

The UK population increased by 7.7% since 1971 from 55.9 million. Growth has been faster in more recent years. Between mid-1991 and mid-2004 the population grew by an annual rate of 0.3 per cent and the average growth per year since mid-2001 has been 0.5 per cent.

England's current fertility rate is about 1.66^[15] children per woman.^[16] This rate is declining since the late 60s due to the introduction of the pill. The maintenance level is with 2.1 children per woman significantly higher. As a result of that, the population of England will decrease and also the demand for real estate. Furthermore the demand will decrease because the declining number of divorces in England. On the other hand there are effects that increase the demand for real estate, especially the positive migration rate. In London, the net migration rate is very high^[17] and therefore London has a positive population alteration. London's annual average growth rate is with 3.3% higher than UK's average with 2.5%. London's growing phase has started more early than in the other UK cities. In the 1990s London was the only growing city in the UK. This results in a higher birth rate than the average was in these days, but even more because of the high amount of immigrants, who arrived. In the 1990s, two thirds of all immigrants coming to the UK went to London. In 2000 the net gain of foreigners, that means immigrants minus emigrants, was 120,000. This number only counts the legal immigrants, the estimated number of non-reported immigrants included is much higher.^[18] When in the 1960s the most immigrants were Asians and since the 1970s Indians, Pakistanis and Bangladeshis, today 67% of the immigrants are from high-income countries. These immigrants help London to rise the property prices more than a half faster than the rest of Britain. On the one hand because of the quantity aspect, the highly positive migration rate implies a high demand on real estate which boost the prices, on the other hand because of the quality aspect, well funded foreigners buy very expensive houses, in West London for example are a lot of Russian oil billionaires, who buy houses starting at 8.5 million euros. In the last six years Russians bought real estate for about altogether $ 4.8 billion.^[19] In 2004 there was the last immigration boost so far when ten new countries joined the European Union. This boost was even intensified due to the fact that Britain was the only EU member who gave the new countries' inhabitants instant access to start working there.^[20]

[...]

^[1] cp. FAZ (2006), p. 47

^[2] cp. Reed (2006), p. 8

^[3] cp. Figure 1, p. 11

^[4] cp. Woodifield (2006), www

^[5] cp. o.V. (2005), www

^[6] cp. Woodifield (2006), www

^[7] London-Travel.de (o.J.), www

^[8] wikipedia.de (o.J.), www

^[9] cp. Visit London Ltd. (o.J.), www

^[10] cp. Figure 2, p. 12

^[11] Amsterdam, Barcelona, Berlin, Brüssel, Budapest, Dublin, Düsseldorf, Edinburgh, Frankfurt, Hamburg, London, Luxemburg, Lyon, Madrid, Mailand, Moskau, München, Paris, Prag, Rotterdam, Stockholm, Den Haag, Utrecht and Warschau

^[12] Hinrichs (2006), p. 1-3

^[13] cp. Figure 3, p. 12

^[14] cp. Figure 4, p. 13

^[15] cp. Figure 5, p. 13

^[16] cp. World Services Group (2006), www

^[17] cp. Figure 6, p. 14

^[18] cp. Economist.com (2003), www

^[19] cp. 3sat.de (2006), www

^[20] cp. Economist.com (2003), www