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How Long Until the London Property Bubble Bursts?

Matt Clinch, special to CNBC.com
Tuesday, 24 Jul 2012 | 5:17 AM ET

Unprecedented growth in overseas investment in London’s property market is causing an increased risk of a housing bubble, a new report warns.

London Housing
Allan Baxter | Image Bank | Getty Images
London Housing

Research by independent not-for-profit organization Future of London shows that London’s housing market has become “distorted and dysfunctional”.

“The growth in overseas investment in London property (mainly from the Far East) is set to continue, despite the higher stamp duty rate. There is a real risk that investment on this scale could create a ‘housing bubble’,” the report says.

Stamp Duty Land Tax in the U.K. is a levy payable when purchasing or transferring property or land, where the amount payable is above a certain threshold.

The author of the research, Andrew Heywood, says that overseas buyersare using the London market for investment and that this issue is mainly overlooked. He concludes that the UK government should do more to promote investment in affordable rather than luxury housing.

“Investment in luxury homes has doubled to over 5 billion pounds ($7.75 billion) a year – five times more than the annual investment in affordable homes in London and a third of all loans made for house purchases.”

The research shows that 60 percent of new homes in central London are being bought by overseas investors. Their anecdotal evidence also suggests that this property is being left empty.

It’s local people that the report says will be losing out. It warns that the rise in house prices could lead to a fall in home ownership which is already down to 53.5 percent compared to 66 percent on a national scale.

Their data shows that the mean price for a house in London has risen from 354,632 pounds ($549,419) in 2007 to 408,384 pounds ($632,695) in 2010 - an increase of 15.2 percent.

Back in March the Financial Times reported that wealthy foreign investors had doubled their spending on luxury homes in London since the start of 2012.

They quoted data by estate agent Knights Frank which showed that house sales over 5 million pounds ($7.75 million) rose 98 percent in the first 11 weeks of the year with transactions totaling 723 million pounds, compared with 365 million pounds during the same period for the previous year.

At the same time as these figures were released the UK government made two measures to try to tackle the rise. Stamp duty was increased for properties over 2 million pounds and a levy was introduced on properties transferred to a “non-natural person” such as a corporate vehicle.

The Future of London report argues that these measures have had little effect saying that Savills property agency have predicted that the London prime property market will rise 22.7 percent by 2016.

“If Government believed that it had solved overheating in the London residential property market, it appears to have been mistaken,” Heywood says.

The report tries to stimulate a renewed debate about the private housing market in London. It suggests that higher taxes on unoccupied high-value properties bought by foreign investors could be ring-fenced. A solution not too dissimilar to France’s proposed policy of increasing taxes on foreign owned holiday homes to help the ailing economy.

Heywood concludes that foreign investment isn't the problem but rather investment that treats existing housing as an asset class. He believes government intervention should be targeted and
informed by clear objectives.

“London needs a housing strategy which ensures that overseas investment in housing is not simply capitalizing on rising asset values but bears costs that are proportionate to the financial benefits.”