Monday, 17 September 2012

PROPERTY ARTICLE: London property and the Euro. Copyright SvD.

London property and the euro

I’ve just read a very interesting article about global companies offloading their euros and converting them to the USD. It seems to me that the exit of Greece from the euro is pretty imminent and we could all wake up tomorrow and have to find drachmas for our next holiday in Crete. But what are the implications for the London property market which continues to defy the odds?

Given that the vast majority of buyers of London are from overseas, it would be logical to assume that London property continues to be regarded as a safe haven. London defies the odds year-in –year-out with prices creeping up steadily in spite of the financial crisis of 2008 and the ongoing recession. There is talk of European buyers flooding the market and capital flight- whereby bank deposits are emptied in countries in crisis and the money is spirited overseas- is rampant –ask any estate agent in Central London and the Square Mile.

To make matters simple, picture this- should Greece ditch the euro and go back to the drachma, the value of the drachma could be less than half of the euro. So effectively anyone with savings would see their savings dramatically reduced. A word about capital flight though- it weakens the economy even further because liquidity in the system is stymied.

I’ve also heard that luxury properties in the South of France for example, are remaining unsold- the rich foreign elite aren’t even spending on their dream homes, a sure sign that even they are biding their time to see what happens. I recently spoke to an Arab client about their investment plans. He asked me to look anywhere but Europe!

My own personal view is that London will continue to buck the worldwide trend but as the great spiritual masters remind us, nothing lasts forever. The repercussions of the eurozone crisis will be felt far and wide and stem from an economic quagmire that will not be resolved by any amount of rescue lending or enforced austerity. Eventually London will feel the effects of a failed currency and mass unemployment from across the Channel. The financial markets will become even more volatile and the net result is tighter controls on lending and less investment- both with a negative impact on growth.

There is also the question of the strength of sterling against the euro and USD. Eventually too sterling will be readjusted as the biggest trading partner the UK has is with Europe. Sterling is currently being propped up by quantitative easing and low interest rates that the Central Bank is hoping will make British exports more attractive (and which in turn will kick start growth). In a worst-case scenario, sterling will get weaker and the ripple effect will result in stagnant growth in the property sector. So in the medium to long term the prospects for continued growth in London property values will largely depend on what is happening in Europe.

London agents remain very optimistic about the prospects of continued appreciation of Central London property. Interest from overseas buyers has not waned and remains strong right up to the top end of the property market. And as long as that is the case, London will remain a startling phenomenon of hope over experience.

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