London has cemented its status as a haven for rich foreigners whose homebuying is stoking property prices there and masking weakness elsewhere, according to former Bank of England policy maker Sushil Wadhwani.
“The euro zone has eased up, but then there always seems to be a crisis somewhere in the world and the money seems to regard London and a few other places as the appropriate place for it to be parked,” Wadhwani said in an interview in the U.K. capital yesterday. “The 2008 experience has scared rich people so much, they’re willing to pay quite a lot for what they deem as insurance.”
Investors from regions such as the Middle East and the euro area are fueling purchases of real estate in prime London districts from Belgravia to Mayfair as a haven from economic and political unrest at home. Along with Chancellor of the Exchequer George Osborne’s Help-to-Buy plan and the central bank’s credit program, that demand is supporting property values in the city to record levels as weakness prevails in other areas of Britain.
The national housing market “on some aggregate measures does look overvalued,” said Wadhwani, founder and chief executive officer of Wadhwani Asset Management LLP. “But if you look at those aggregate measures, it’s really driven by London.”
The pound’s decline has also helped attract international investors. Sterling has fallen about 2.8 percent this year on a trade-weighted basis, and is the worst performer after the yen among 10 developed-market currencies. Sterling was little changed against the dollar at $1.5435 as of 9:50 a.m. in London.
Central London luxury-home prices rose 8.4 percent in February from a year earlier, the biggest gain in 10 months, Knight Frank LLP said last month. Values excluding the capital city rose an annual 0.5 percent in March, Acadametrics Ltd. said on April 12.
Taylor Wimpey Plc (TW/), the U.K’s second-largest homebuilder by volume, said yesterday that national market conditions were “stable” and London was of “growing importance” as south east England led an increase in customer interest.
While it’s difficult to argue that property in some areas outside the capital is “egregiously overvalued,” London “is a different kettle of fish,” Wadhwani said.
Osborne’s announcement in his March 20 budget to use taxpayers’ money to make interest-free loans to homebuyers and guarantee mortgages risks inflating house prices, a panel of lawmakers said last week. The initiatives follow the Bank of England’s Funding for Lending Scheme introduced in August to boost mortgages and company loans.
“It’s the paradox of policy that we want to avoid the mistakes we made before, but in the meantime in order to get some growth we’re willing to do the same things that we did before,” said Wadhwani, who was a BOE Monetary Policy Committee member from 1999 until 2002. “To some extent, that is what is occurring now.”
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