But is the price really disconnected from rents on comparable properties?
The way I think about it, is that if buying a house can yield you 2-3% - either through expected house price growth or through rental income or both - someone will be buying it at that price, because it makes economic sense in a low interest rate environment (i.e. you won't find any other assets with similar risk that will give you a higher yield). Who ends up being the buyer is not particularly relevant - as long as the yield is there, somebody will be buying at that price.
The question then is,
1. Are rents too high? Unlikely, rents are very much supply/demand driven.
2. Are yields too low than what is justified? Possibly. Rental yields in central London seem to be around 3.5%, which seems quite low if you take into account the costs and the risks.
3. Are investors pricing in too much price growth? Possibly - related to point 2 above.
But it doesn't seem like current buyers are paying completely irrational prices for the houses. So it does not seem like we are in a bubble. Of course, if interest rates go up, we will see housing drop, and as expectations of future price growth are reduced because of that, we should see a bigger decrease in house prices than is warranted by interest rate increase alone. Add to that the potential of some people not being able to pay their mortgage at higher interest and being forced to sell, and the prices should dip even more than "intrinsic value". If this effect propagates to the wider economy, people might lose their jobs, forcing more people to sell, resulting in a full-blown liquidity event where it becomes a buyers' market for a short while.
Now, whether interest rates will go up significantly and whether once there are signs of such a liquidity event they will stay high is anyone's guess.
The way I think about it, is that if buying a house can yield you 2-3% - either through expected house price growth or through rental income or both - someone will be buying it at that price, because it makes economic sense in a low interest rate environment (i.e. you won't find any other assets with similar risk that will give you a higher yield). Who ends up being the buyer is not particularly relevant - as long as the yield is there, somebody will be buying at that price.
The question then is,
1. Are rents too high? Unlikely, rents are very much supply/demand driven. 2. Are yields too low than what is justified? Possibly. Rental yields in central London seem to be around 3.5%, which seems quite low if you take into account the costs and the risks. 3. Are investors pricing in too much price growth? Possibly - related to point 2 above.
But it doesn't seem like current buyers are paying completely irrational prices for the houses. So it does not seem like we are in a bubble. Of course, if interest rates go up, we will see housing drop, and as expectations of future price growth are reduced because of that, we should see a bigger decrease in house prices than is warranted by interest rate increase alone. Add to that the potential of some people not being able to pay their mortgage at higher interest and being forced to sell, and the prices should dip even more than "intrinsic value". If this effect propagates to the wider economy, people might lose their jobs, forcing more people to sell, resulting in a full-blown liquidity event where it becomes a buyers' market for a short while.
Now, whether interest rates will go up significantly and whether once there are signs of such a liquidity event they will stay high is anyone's guess.