Citywire for Financial Professionals
Stay connected:

Citywire printed articles sponsored by:

View the article online at

Chart of the Day: investors seek safety in… big London houses

Prime central London house prices have been boosted by safe-haven flows, but could drop 50% if the euro breaks up.


by Chris Marshall on May 31, 2012 at 10:00

House prices in prime central London (PCL) – Chelsea, Mayfair and the like – have outperformed Greater London by 30%, and the UK as a whole by 34%, since the end of 2007.

But the trend goes back longer than that. Why is this? A new report conducted by Fathom Consulting for Development Securities cites three drivers: global equity prices, the relative value of sterling and safe-haven flows.

The third of these is the most important, it concludes. ‘Since 1995, up to 75% of the increase in value relative to the rest of the UK can be attributed to safe-haven flows… and their influence has intensified in the past four years with growing fears about the demise of the euro following the 2008 crash,’ the report says.

Why? There are several reasons: the use of sterling as a hedge against the newly formed euro, an initial improvement in the credibility of UK monetary policy when the Bank of England was made independent in 1997, and the more recent safe-haven flows in the credit crunch and subsequent European debt crisis.

As a key driver of the wealth of high net worth individuals, cyclical movements in global equity prices have accounted for a significant degree of the variation in PCL relative to the price of property across the UK as a whole. And yet… those cyclical ups and downs presently net out to something close to zero.

So although movements in global equity prices have accounted for much of the variation in the relative price of PCL, they account for none of the net increase since the beginning of 1995. This net increase is explained in part by a marked depreciation of sterling against the euro, particularly through late 2007 and into 2008, which will have made PCL significantly more attractive to foreign buyers, relative to property in other European cities.

Specifically, we find that movements in sterling against the euro have boosted the relative price of PCL by some 5% since the beginning of 1995. Over the same period, movements in sterling against the US dollar have had no net impact. There has also been some upward pressure from our measure of mortgage supply conditions.

A reduction in mortgage supply cuts property prices in both PCL and the UK as a whole. But the impact on PCL is much smaller, causing the relative price of PCL to rise. We find that a tightening of mortgage supply conditions has added around 5% to the relative price of PCL since 1995. However, we find that the bulk of the rise in the relative price of PCL since the mid-1990s is explained by safe-haven flows. These came in two waves: the first from 1997 until 1999; and the second through 2010 and 2011.

In uncertain times, an investor will often accept a lower expected return on an asset that he or she perceives as less risky. In terms of residential property, this means an investor may pay an unusually high price and accept a low rental income in exchange for an asset whose future capital value is believed to be relatively certain. When large amounts of money are channelled into assets that are perceived as safe in comparison to other assets, these are often referred to as safe-haven flows.

There are a number of occasions since the mid- to late-1990s when, anecdotally at least, sterling assets have benefitted from safe-haven flows, particularly out of assets denominated in euros or out of the legacy currencies that now form the euro.

We use information from gilt spreads to construct a synthetic variable that is designed to capture safe-haven flows. This synthetic variable is fixed at zero until 1997 when it starts to climb steadily, levelling off in 2000. It then remains constant until 2010 when it rises further.

When we include this new variable, we find that we can explain almost 85% of the movement in the relative price of PCL since the beginning of 1995.

Since 1995, safe-haven flows have boosted the relative price of PCL by a little over 30%. Moreover, they have accounted for more than three quarters of the increase in the relative price of PCL that can be explained by our model. Over the period from 1995 to 2011, they have been by far the most important driver

The nationality of residents in PCL reflects this, as the report notes: ‘More than half of the resident population of Westminster and Kensington & Chelsea – the two boroughs that contain the bulk of the prime market – are from overseas.’

But just because prices have been rising steadily, it doesn’t mean they can’t drop. If the eurozone breaks up sterling would appreciate and prime central London would lose its safe-haven lustre.

‘Consequently, investment would flow out of London and into "cheaper" capitals in Europe causing PCL prices to fall by up to 50%,’ the report concludes.

5 comments so far. Why not have your say?


May 31, 2012 at 12:27

Fingers crossed then!

report this


May 31, 2012 at 13:36

I have rarely read such tosh ! It is quite clear that the authors of this report haven't the slightest understanding of the London house market( PCL in particular) and I recommend that they talk to those in the market dealing with them. If prices in PCL fell 50% then you would find 100% of the property owned in short order by overseas investors ! Yes, the market could fall, but not 50% ! Vendors simply wouldn't sell and the number of houses available would fall dramatically. I hope Development Securities don't act on the conclusions without very serious thought. We had this sort of academic reasoning at the beginning of the Recession - but values rose despite them in London.

report this

Tongue of Fire

May 31, 2012 at 17:04

If sterling appreciates, then why sell, why not hold onto the gain?

You have already seen that the more expensive it gets, cf the hike in stamp duty to 15%, that that did not put anyone off. It may have sorted a few men from the boys, but no more. Wealthy foreigners are looking for privacy, not merely short term "lucrification" The area which you are describing is a separate market, subject to its own behaviour pattern, as only a certain type of buyer is interested in it. If the forces influencing that particularly insular market change then the values will, but not before. The €'s impact will not stop the flow of currency already converted out of it, and no EU citizen having debunked the eurozone will want to go back in with the loot to live there. He might invest back in cheap, but probably not buy property merely to live there.

report this


Jun 01, 2012 at 04:52

London is a destination, not a station on a hot money flit. Only the threat of penal taxation will wrench from their hands that nice house/apartment within walking distance of Harrods.

report this


Jun 03, 2012 at 20:45

Sure, prices could fall 50%. But equally they could then rebound by a greater margin, as they did after the 2008 crash.

report this

leave a comment

Please sign in here or register here to comment. It is free to register and only takes a minute or two.

More about this:

What others are saying


From the Forums

+ Start a new discussion
Sorry, this link is not
quite ready yet