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All I can say on that one is that the rents are roughly in line with property prices. Rent is like the dividends on a share. I pay less for my 3 large bed house here in TPL than what the new tenants are paying for a small 2 bed house in zone 4.
You can buy a property and rent it out at profit, even with a BTL mortgage. That means you can buy it as an investment that has a return (and decent relative to the sub-inflation rates on saving), not just hoping prices go up pyramid scam style.
In 1989 the combination of the doubling of interest rates (7.5 -> 15%) along with the withdrawal of MIRAS (tax relief on interest) shut the show down.
If rates go up like that then definitely there will be a serious wobbly. Likely? Don't know, but Japan has been stuck near zero interest rate land for about 20 years now.
London has about 1 million more inhabitants while having smaller family sizes then back in 1989 and we've not been building to accommodate that, all of which supports rents.
Steep Interest rate rises and policy changes like Alan suggests are the main risk factors to house prices. With the Tories in charge, I doubt there will be much house price deflating policy.
But rent has a natural cap on it as people will not starve for the privilege of working and living in London. So the dividend analogy is close but it doesn't cover it, houses are different.
"Rent has a natural cap on it ..." John, can you please explain your thinking behind this?
I recently met a few of the squatters who'd moved into Protheroe House, near Tottenham Police Station. Due to the usual council incompetence the building was left empty since last January. They told me they were working, but earned less than what they needed for rent and travel. (The building is now empty again.)
To be fair, I suppose they could have tried couch surfing, hot-bedding, sleeping on buses, or in the airport. Last year, a few streets from us, we had a family with small children sleeping in a car. Of course, there's now a shortage of stables. And sleeping outside may be risky. The last time I looked under this bridge, the bedding had gone, but there was debris which looked like there'd been a fire.
Alan the Tories want those people out of London. The natural cap is based upon what the average Londoner CAN pay and young people with no children can share houses on the minimum wage still. This is the natural cap I am talking about, your example is tragic but still does not negate what I am saying.
Given a static population and no differentiator between areas, there's a natural cap. But people move away from an areas they can no longer afford and others move into that more desirable area - that's part of the gentrification process. Regardless of the social/fairness implications, that is the dynamic at work. I'd live in zone 1 or 2 if I could afford a 3 bed there, but I can't so I go further out.
There's a variant on your argument which does hold: what is the size of the pool of people that can & want to afford the rents for an area vs the # of properties. If the #people > #properties then prices are supported. If not, then bubble.
Houses are the only items on the shelf (as opposed to say, bread) that when their price goes down the whole population gets depressed - Why ?
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