Are we witnessing modern Tulip mania?

At it’s peak in May 1637 a single tulip bulb sold in Amsterdam for more than ten times the annual income of a skilled craftsman. In what perhaps for many defines an asset bubble, the early 1600’s saw the price of the then most fashionable flower rise to over 4,500 florins. At the time, a skilled craftsman earned about 300 florins a year and so it is today with houses. 

The average age in the Uk is £26,000 and yet in prime Central London prices of £2,000 or even £3,000 per square foot are not considered unusual. Two grand for the spot where your kitchen bin is! In the rarefied, pin-stripped property market of SW3 the market buzzes with talk of sales like One Hyde Park, the sumptuous and much-hyped development at the top of Sloane Street being built by Candy and Candy. Flats where the corner shop is Harrods, horse guards ride past twice a day and where they were reportedly hoping for prices of £4,000 psf. 

House prices in the capital have recovered their losses and passed their 2008 peaks. Demand for the very best property from those who survived the Credit Crunch and from wealthy foreigners has more than kept pace with the meagre supply of homes for the super rich and whilst the number of deals has shrunk to the size of the contents of channel swimmers trunks they are now most definitely ‘on the turn’.

In 2009 there were just a dozen deals done in central London over £10m. In the first quarter of this year that number has already been overtaken and in Belgrave Square the most expensive house in Britain has I understand, just been sold – for over £60m.

A lovely flat in Grosvenor Square, the sort that would have appealed perhaps to either a domestic or international buyer just a decade ago is now beyond the reach of all but the very wealthiest. As you’d expect for a home on the best square on the Monopoly Board with reception rooms and bedrooms overlooking the gardens it was snapped up and in April sold by Mayfair property guru Peter Wetherell. His guide price was £7.75m or £3,000 psf.

However, instead of a warm glow all this excess leaves me feeling like the little boy who has spotted the Kings’ wardrobe malfunction. Although everyone is fawning at his feet, they see what they believe they should see rather than the rather unattractive vision of a middle age man that I behold. (Ever wondered why there are no nudes of 50 year old bankers?) I have clients who between them have over £100m to spend on property – most want to buy now and all can afford to do so without having to borrow the huge amounts needed by first time buyers but to my eye the market is over-cooked, buoyed up on bluster and bullshit! House prices I think in Central London are over valued by pretty much any metric you care to consider. 

If you consider ‘yield’ or the return you could expect on your money then you can compare property to other forms of investment and get a handle on relative ‘value’. If you bought a snazzy pad for £1m as you can today from posh Knightsbridge agents W.A. Ellis in say Beauchamp Place then you could expect to let it out for about £650 a week. That’s a return or ‘yield’ of less than 4% gross! You could get close to that in a bank and avoid an illiquid asset that has high transaction costs to buy and sell as well as one that can actually fall in value! 

We’ve had twenty five years of rising prices and prime central London has faired well but buyers today justify accepting a miserly 4% yields only because they expect capital appreciation, for prices to continue to rise yet going around 24 of the best agents in Chelsea and Kensington as I did yesterday I couldn’t find one who would go on the record and state that house prices were certain to be higher in 12 months time. 

I accept that there is demand for the very best properties in the Capital and that there are deals being done at these crazy levels and as such, to some this alone confirms their ‘value’. I accept that these are not sales to friends or to other investors and in the case of One Hyde Park that they are being done at over £6,000 psf but I don’t think that these give us a steer on real values. These homes are beyond value and I have only just got it!

Despite nearly thirty years in the business I have only really understood properties like One Hyde Park very recently. The Candys are master marketeers and time and again they have carefully and diligently built a product and pitched it to a market that most agents and commentators thought was unreachable. I was one such sceptic. But it’s not about value in the normal sense of the word. These guys sell dreams and aspirations and they have cleverly done to property what designers have done to cloths and advertisers have done to bottled water. They have made some ordinary extra-ordinary and they have convinced other people to buy it! I think I now see that these kind of people and those who work for them peddle dreams. But I’m not in the business of flattering egos – as I often tell my clients when we are discussing an optimistic agents’ asking price “I want to buy their property, I don’t want to make a friend”. 

Those who do buy these über properties inhabit a world where it’s no longer good enough to just have a flat in London – you’re not a member of this exclusive, global club without a base here. “Something at One Hyde Park, I expect?” is the more likely question – to be met  if not with a frown and expressions of concern that perhaps you have had a set back and may no longer be a member of the obscenely rich club. Just as the rich don’t have a Rolex because it tells a better quality of time than a Swatch or drive a Maserati because it gets to Sainsburys any more efficiently the fabulously wealthy have a pretty blond on their arm and buy these trophy properties because they can and woe betide the flunky who suggests that they may be over-paying or not getting ‘value when they do. 

Central London will continue to attract the very richest because despite our own concerns about our capital to those from eastern Europe and Greece, London remains very safe, very stable, has great schools, a reasonable climate, where you can buy a dream and is still somewhere you can do business in a currency other than the Euro!