Investors Love London Real Estate. That's a Problem.

Britain's economy may be growing at a faster rate than its European counterparts, but there are two statistics that ought to give concern: London's stratospheric real estate prices and the country's current account deficit (which measures the sum of exports and imports and net investment flows as well as net transfers). They are, in fact, two sides of the same coin. And both point to a painful correction to come if measures aren’t taken to restore balance.

Such a correction would unfortunately not be a first: A number of the worst current account crises that have been observed since the end of the Bretton Woods agreements have ended in severe real estate and currency corrections. One need only think of Spain or Ireland during the recent financial crisis. Similarly, while not to the same extent, a number of countries such as Australia or New Zealand have material current account deficits financed by real estate investment inflows inflating local housing prices.