I'm always fascinated by situations in which prices reach what appear to be unsustainable levels -- how can you have a large city in which prices are unaffordable to most of the citizens? After all, I doubt more than a few % of Londoners earn investment banker incomes or have million-Pound legacies. The phenomenon raises several questions:1. Are the asset prices for London flats overvalued? What is the P/E ratio for them -- how much is rent on a "$1.5 mio GBP" flat? Perhaps the high prices are temporary.2. A related issue is mortgage rates. Are they low? People don't pay P = 1.5 mio GBP for a flat, they pay r*P per month for a mortgage. If mortgage rates are low (or people are switching to adjustable-rate-mortgages that make initial rates seem low), then asset prices may be inversely inflated.3. Are liquidity issues part of the problem? If too few existing Londoners are willing to sell and too many wealthy people are arriving, then prices will will be unaffordable even as most of the existing citizens can afford a place. Is there much turnover in the London housing market?4. How much of the price increase is due to London's congestion pricing scheme for traffic? Are people moving in closer to avoid needing a car. Avoiding a 5 GBP weekday charge is worth a mere 25,000 GBP NPV @ 5%, but that doesn't include the "hate factor" (Research in e-commerce spending behavior showed that people would willingly pay $5 extra for a product to avoid $1 in sales tax). Add a hate factor and money saved by no having a car, and people might be willing buy a centrally-located flat for a 100,000 - 200,000 more GBP than they would otherwise.5. How much of this is attributable to a good mass-transit system? Without low-cost transport from the suburbs, a large high-price city core would be unsustainable because it would be starved of low-paid workers (waiters, secretaries, retail clerks, et al). A city doesn't need "affordable housing" if it has affordable transportation.I don't know much about London (I've visited a couple of times -- great city!) and would be very interested to hear what people think is the cause of so much housing being so unaffordable to so many people.
Last edited by Traden4Alpha
on January 9th, 2007, 11:00 pm, edited 1 time in total.