A "Feeding Frenzy" in London Property

Sellers are asking--and getting--fantasy prices. Can it last?

Last month, real-estate brokers Goldschmidt & Howland listed a four-bedroom, 2,300-square-foot house in the leafy North London neighborhood of Hampstead for $3 million. Within two weeks they had nine bids--and a deal for about $4 million. Not bad for a rather ordinary house that needed updating. "This is a prime example of a feeding frenzy," says John Hughes, a managing director at the firm.

Frenzy is right. After a brief lull following September 11, London house prices are once again soaring: They were up 16% year-on-year in the first quarter, according to the Nationwide Building Society. Although hit hard by the financial crash, the City of London is still the force fueling the market for top-end properties, as buyers flush with 1990s fortunes seek alternatives to stagnant stock markets.

Well-heeled Americans and Europeans are also driving the high-end market, while Britons, prosperous after years of solid growth in their economy, are keeping mid-market prices rising. Finally, plenty of buyers are picking up houses with a mind to renting them for the income, adding to the speculative froth. As a result, sellers are demanding what brokers think are fantasy prices--and getting them. That leads their neighbors to set their sights even higher. Buyers suffer sticker shock but are still willing to pay up. After all, property is the favorite investment of the British. "Safe as houses," the old saying goes.

Some analysts are wondering how long this boom can run. "I think it's a bubble, particularly in London," says Roger Bootle, managing director of Capital Economics, consultants specializing in real estate. He thinks a sharp decline in values is coming--probably early next year, after the Bank of England starts raising rates. He still doubts things will get as rough as the early 1990s crash, when prices fell by about 30% in two years, devastating both homeowners and contractors.

Some warning signs already are appearing. Average London house prices are now eight times the annual take-home income in the capital--close to the nine-times rate that prevailed just before the 1980s crash. And despite soaring prices, rents have slipped by about 8% on average, according to John Rockel, head of lettings and management at Hamptons International, a London real-estate firm. "With such a glut of rental properties, I cannot envisage prices staying at these levels," says Karen Phillips, a consultant who finds rentals for expatriates.

But there is still lots of fuel to stoke the boom. Recent mortgage rates of just 4.9%, combined with downpayments of 5%--or sometimes even less--are making even pricey houses look affordable. So far, there's no sign the banks will wind up holding the bag: Repossessions and mortgages in arrears were at a 10-year low at the end of 2001, according to the Council of Mortgage Lenders.

All that easy money is chasing stocks of unsold houses that are at their thinnest since 1979, brokers say. At Hamptons, which serves the middle and high-end markets, the average sale price has jumped almost 30% in the past year alone, to $894,000. "It is amazing how little £3 million [$4.4 million] buys in London today," says Adrian Owen, who handles high-end properties at Hamptons. Prime residences in London are apt to command as much as $1,750 a square foot this year, putting it above Paris ($855) and Berlin ($500), according to London realtors FPDSavills International.

For those not blessed with limitless wealth, the house hunt can be torture. Kathleen G. Rausch, an interior designer, scoured the better London neighborhoods for a year for something in the $725,000 range. "We couldn't find anything that wasn't an absolute dump," she says. She finally settled for a three-bedroom place in the western suburbs for around that price, thinking it was too much. But now, her neighbors are listing their four-bedroom properties for $1.1 million. They will surely get it--as long as the boom psychology lasts.

By Stanley Reed in London

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