Philip Pilkington: Could a Russian Intervention in the Ukraine Burst the London Property Market?

Yves here. It’s remarkable how much of London has turned into a ghost town thanks to the influx of serious foreign money. When I worked for a few months in London, in 1984, it was Mayfair that was the destination for Saudi money, and it clearly had far too little in the way of street life relative to the density of homes. By contrast, Belgravia, another very tony neighborhood, was staid but you did see services for locals (pharmacies, small groceries, pubs and eateries) and people out and about. On my last visit to London, Sloan Square and Kings Road around the Saatchi Gallery (which did not exist when I lived there and among other things, displaced a Tesco) looked as if someone had dropped a neutron bomb: everything was clean, there were plenty of upscale shops and a few brasseries, but just about no people to be seen on a sunny late spring early evening.

Even though Pilkington wonders whether London real estate might take a bit of a knock due to expropriation fears, the fall in the ruble alone will dampen investment

Russian flight capital isn’t as strong a factor in New York City, but it isn’t negligible. Foreign investors have been a big factor in Brooklyn, targeting townhouses that they can turn into rental properties. A broker with one of the biggest agencies estimated that 70% of the sales in Brooklyn were to investors of various types (including domestic private equity players) and only 30% to owner-occupiers. And we’ve also had a ramping up of the traditional purchasing of a pied a terre or more, in Manhattan by the global wealthy, particularly Russians and Chinese.

By Philip Pilkington, a writer and research assistant at Kingston University in London. You can follow him on Twitter @pilkingtonphil. Originally published at Fixing the Economists

Over and over again I’ve been asking myself: is there a housing bubble in London? Certainly house prices are booming but I was never comfortable calling a bubble in the typical sense of that word.

Why? Because this didn’t look like a standard asset price bubble. Bubbles are driven by credit. But the London market is being driven by cash flowing into the top-end of the market.

It is areas like Chelsea and Mayfair that are really driving the London property market. These houses are being bought, not as residential properties, but as financial assets.

In the current low-yield, QE environment cash is pushed into a wide variety of risky assets. That is why we see stock markets booming while the real economy crawls along at a snail’s pace. I reckon that financial advisers have long been pushing the extremely wealthy into very high-end property in various large cities.

In London a lot of the high-end property is bought up by Russian billionaires. At the start of this year The Guardian did a report on something that had long been folk knowledge in London. In the report entitled Inside ‘Billionaires Row’: London’s rotting, derelict mansions worth £350m Robert Booth wrote,

A third of the mansions on the most expensive stretch of London’s “Billionaires Row” are standing empty, including several huge houses that have fallen into ruin after standing almost completely vacant for a quarter of a century… Estate agents and property developers said the avenue was in transition, with apartments under construction that would bring life back to the area, but said high vacancy rates were inevitable in an international market such as London where buyers come from the Middle East, Russia and increasingly China.

The foreign money that was flowing in to the high-end of the London market is what has really driven up prices. The lower-end of the market, which has not increased in value at nearly the same rates, is following that trend, not leading it.

I always thought that the end to this would be when the low-yield zero interest rate environment was reversed by central banks — something that is unlikely to happen for a rather long time — but the recent threats of economic sanctions by the West against Russia raises the question: what if Russian assets in London were seized or Russian money prevented from entering the market? If this occurred could it hit high-end property prices in London to such an extent that the enthusiasm was driven out of the whole market?

It is certainly a question worth raising — even if we cannot give a definitive answer. In credit-driven property bubbles it is the bottom of the market that falls out first as low-quality loans to people who cannot afford repayments go sour. If the above scenario played out we would see quite the opposite; namely, a property market that goes rotten, like a fish, from the head down.

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  1. Nicholas Shaxson

    Britain taking serious action against Russian (or other ex-Soviet) oligarchs? I would expect to see pigs flying in swirling flocks around Big Ben first. Take a look at this, from The Guardian today
    “Britain is drawing up plans to ensure that any EU action against Russia over Ukraine will exempt the City of London, according to a secret government document photographed in Downing Street.”

    And Russian oligarchs’ property is very much part of the City of London’s turf.

    More generally, this raises much bigger questions than the (important) question of London property prices. The City will prevent any serious action against Russia (or China, for that matter) because it will be bad for “business.” This poses big national security dangers:
    Expect the UK’s reliability as a U.S. ally to keep shrinking, as the craven ‘ask-no-questions butler-to-the-world’ attitude takes ever deeper root.

  2. j gibbs

    Balzac said it best: money has no stink.

    Whatever action might be taken by the “West” (whoever they are), you can be reasonably certain it will be ill considered, undertaken for public relations purposes only, and carefully exempt assets of anyone really rich.

  3. Yonatan

    The UK and EU rely on Russian gas for heating and electricity generation. If that stops, the UK and EU are f*cked, to quote Nuland.

  4. allcoppedout

    I doubt the West (whoever that is to echo gibbs) will be fool enough to engage with Russians who can actually fight. My experience of London is similar to Yves’, as would a visit by most Brits. It’s less part of the UK than Scotland or Wales. I wonder on the history of what Nicholas Shaxson has collated so well on looting and offshore. The Nabobs once built mansions in London based on cruel exploitation in India and various joint stock ventures were really piracy. Sevastopol was once a slave port (for white slaves). Across the Middle East one sees vast palaces under construction while most are kept poor (ordinary people complain of being eaten from the inside). The ‘evil money’ is still with us.

    Let’s imagine setting up a company making something. What would the rest of you think of my efficiency idea of buying expensive London property and letting it rot? Is this the kind of thing we would consider if we were planning to make fuel from air using the tidal power of the Firth of Fourth? In 1751 we might have outfitted a few ships to ply slaves from Sevastopol to Algiers as an appropriate allocation of capital. We might have written something on the ‘harvesting of the Russian Steppe’ in our prospectus. I’ll soon get us round to the ethical-economic perspective needed in successful business. Forget any of that rot about useful products like homes people can afford to live in and fuel that takes carbon out of the atmosphere using renewable energy. Get your heads round the Ponzi-Laffer ethics of real business and trickle-down QE. I pass round a video of water leaking from the gutters of a rotting mansion to make my case. Some Russians want to buy it with money stashed in the British Virgin Islands. Now the rouble has collapsed along with the hryvnia we can buy vast acreage in Ukraine. I have a deal with the Saudis for the food output. It’s all so much more ethical than exporting the populace there as slaves, though our dancing girls side line is still working well. Russian oil and gas is now cheaper because Ukrainians can’t afford to buy it for wasteful purposes like home heating and with the rouble so low since we enticed Putin to send his lads into Crimea. Frau Merkel is very pleased with us. Pity about the London mansion market, but our exposure is hedged, literally as we never do any garden maintenance, but seriously by Chinese sales that are masking our own retreat into productive assets in Ukraine, Argentina and anywhere cheap.

    There’s a special meeting for those with traditional ethical concerns. It’s in Room101.

    1. ignim Brites

      The notion of London as an independent city-state is likely to be realized in the next financial crisis when the City looks to the country for a bailout.

      1. Yves Smith Post author

        The City of London (aka “the square mile”) IS an independent state. Since time immemorial to boot! Read Shaxson on that.

  5. Abe, NYC

    This silly war could be ended in 3 days by travel bans and asset freezes. Magnitsky Act had Russian elites foaming at the mouth because it hit them where it hurt – and it only targeted a dozen of officials. Skiing in the Alps, vacationing in Riviera, shopping in New York matters a lot to these folks, not to mention Manhattan condos and London townhouses. A serious threat to travel and assets would have Russian elites up in arms against Mr. Putin – it’s their own property we’re talking about, not some poor man’s vacation spot on the Black sea. And I suspect that government officials make up a very large part of Russians who purchased property in London. But yes, the UK is unlikely to take a serious action against Russian elites.

    1. Veri

      Russia has around $160-$170 billion in US Treasuries they can dump onto the world market in a minute. Never mind that The EU is hugely exposed to Russian nat-gas and is not likely to find losing 25-40% of its energy in one day, fun.

      So, we seize assets of a few rich Russians. Congratulations, Russian oligarchs will be wary of investing in The West. We see The City in London already desperate to exempt themselves from any sanctions; don’t want to lose those billions of pounds, euros, and dollars that provide for fat bonuses and profits that Russians can provide.

      After Iraq, Libya, Syria; The West has no moral legs to stand on. The neo-con, neo-Liberal economic majors running The West have squandered what little good will and moral authority they claim to have.

      Will The West condemn or support Ukrainian nationalists who have seized power? Even now, there are reports of people disappearing, armed thugs forcing regional and town government officials to resign, etc. in the name of The Junta in Kiev. One massacre and Russians have the moral authority to intervene; as The West did in Libya. Ooops. The West has provided Russian with the moral authority to intervene in Ukraine if the Nationalist Junta in Kiev oversteps.

      And it is interesting to see two Ukrainian Oligarchs given their own fiefdoms in Eastern Ukraine, by fiat appointment. Wasn’t that one item Maidan Square Protestors were protesting against? Out with the old, replaced by the same.

      1. Abe, NYC

        Russia has around $160-$170 billion in US Treasuries they can dump onto the world market in a minute. Never mind that The EU is hugely exposed to Russian nat-gas and is not likely to find losing 25-40% of its energy in one day, fun.

        OK, I admit it will take the Fed more than a minute to mop up the $160-170bln. Given the the time it takes to scale up the QE, it will be more like a day or two, during which the yield make climb – gasp – 50 or so basis points before falling back. Natural gas is more of a problem, except they’ll be primarily hitting Germany and Eastern Europe (at the cost of seeing the ruble fall through the floor in an ever more import-dependent economy). And lest we forget, the travel and asset sanctions can be targeted towards government officials and may not entice popular protest even despite the might of Putin’s propaganda. I suspect the news that, say, district police chief’s Swiss bank account was arrested, won’t elicit much sympathy among the miners of Kemerovo.

        After Iraq, Libya, Syria; The West has no moral legs to stand on.

        You should have mentioned Kosovo first. Abkhazia, Ossetia and now Crimea, is the price for violating OSCE’s inviolable borders. It’s still unclear to me why Ukrainians or Georgians must pay the price though.

        The West has provided Russian with the moral authority to intervene in Ukraine if the Nationalist Junta in Kiev oversteps.

        The “Nationalist Junta” in Kiev is far more transparent and accountable than the chauvinistic, corrupt, and murderous Junta sitting in the Moscow Kremlin. Lest we forget, the Ukrainian leaders were elected in a transparent election.

        1. k

          The Ukrainian interim government was elected? That’s news to me. Oh, you mean elected by the United States, in that sense maybe it was.

          What is transparent and accountable about the new Ukrainian government, I am curious to know? Thanks.

  6. Finster

    Dear j gibbs: “money has no stink.”

    That would have been Roman Emperor Vespasian putting a levy on public toilets. – Pecunia non olet.

    Regarding sanctions against Russia, I can see Germany heavily dependant on Russian Nat Gas, I dawning realization that Russia has been going for the Crimea since 2 centuries and it’s so deeply embedded in their national interest that there is no room for bargianing. As for the UK, they are so single mindedly focussed on their extractive advantage regarding finances and the City, as well a US Vanguard on the restriction of privacy that honestly I cannot fathom why one would want them as ally anymore. All obstruction no capability except for espionage, which is actually hostile to the potential ally.

  7. The Dork of Cork

    No deep analysis of the mutually beneficial outcome for the British Isles and North America if Russia returns to internal use of oil (military consumption ?)
    Mainland Europe is toast – remaining euro claims flee to the “free world” who maintain near monopoly use of seaborne & Norwegian oil /gas trade.
    The free world puts on nation state clothes once again.
    Vlad gets rid of the local oligarchs (who depend on the euro market state for their power) and thus consolidates his position as the new hard man of Russia.

    After a little hot war in the Ukraine a new Cold war renationalizes the worlds money claims.

    People underestimate the pragmatic nature of the bank to maintain its position me thinks.
    The euro experiment was nice while it lasted …we made some money……lets move on and embrace socialism once again as we are all in this together are we not ?

    People seem to have little idea of how deep the British banking state goes.

  8. The Dork of Cork

    Another respected commentator (below) locked into a pre 1914 mentality…….everybody thought back then that countries could not afford to fight a war for more then 6 months.
    Back then it was gold
    Now it is the $
    Same thing really.

    Also North Korea is a bad example as it has few natural resources.

    The most logical option for the Vlad bloke (both to deal with the internal and external threat to himself) is to use the military.


    Now the move on the chess board is with the Anglos – lets see how they will respond.

    1. Veri

      Putin backed The West into a corner. He is daring them. He knows they can not reasonably respond with military force. Sanctions? Even The City in London is looking to exempt themselves from sanctions, they are so desperate for Russian cash.

      Russia is the world’s largest exporter of oil… and the dollar reserve status and American hegemony is predicated on oil, being priced in dollars. One can see the headlines now, “Russia Oil will only accept payments in ruble, yuan, -insert currency here- or (god forbid), gold.”

      Russia has $160-$170 billion to dump in a minute onto the markets, in USTs.

      EU exposure to Russian nat-gas.

      Military conflict? NATO forces ran out of bombs over Libya. Had to be supplied by The US.

      Afghanistan. Russia could easily close down the air corridor through the ‘Stans.

      And, The SCO. A Russian-Chinese equivalent to NATO. Of which Iran is has observer status. People forget about this. Which side would the Chinese choose? We know they want The US knocked out of superpower status, to take the place of The US.

      Nah. What is happening now is posturing for negotiations for a settled solution. The West knows that the risks are too great, for them.

    2. Cesar

      Dork, I’m a huge fan of your posts but referring to Karl Denninger as “respected” almost has me wavering . . .


  9. washunate

    It’s good to see stabs at the political side of political economy, but I have to wonder about the ignorance on sanctions since they’ve been such a core component of US oppression around the world?

    Sanctions are for the little people. Sure, logistically, the US and Britain could essentially remove Russian interests from the West. But that would basically destroy the West (or at least, what’s important to Western elites – being the financial center of the planet and being able to project force around the globe).

    Russia had troops in Crimea last year. They will have troops there next year. No one in power in the West wants to upset the apple cart of global elites parking wealth physically and philosophically in NY and London.

  10. Banger

    This crisis looks to be dissipating. I think we are seeing the usual posturing and bellicose pronouncements from the U.S. (is it becoming the new North Korea of empty rhetoric?) and weasel words from a few Europeans. I don’t think it will get to sanctions–Russian money or Saudi money has a way of speaking in world capitals.

    The current government of Mr. Cameron seems to be in favor of the London property bubble–he appears to hope that it will spur economic activity and will not endanger it unless general war breaks out.

  11. Working Class Nero

    Neo-liberal globalization is all about having slaves in poor countries manufacture products or extract resources which are then sold to the mostly under or unemployed in the first world. It is conversely about enriching the slave masters in the poor countries whose wealth is then re-invested back into the first world through oligarchic conspicuous consumption and/or bond purchases. This ensures the poor countries stay poor and the rich countries have barely enough resources to keep their unemployed consuming without threatening the standard of living of their own oligarchic class.

    So it is very unlikely that Russian oligarchs will be banned from sending their wealth back to the London. Thus could only happen if Russia themselves decided to pull out of both ends of the vicious globalization loop. But as of yet Russia is not showing any signs of creating an anti-globalization bloc.

    1. MyLessThanPrimeBeef

      No need for that fine distinction as London real estate looks to continue its soaring journey at this moment (don’t know about tomorrow).

  12. Lafayette

    I am more worried about those Russian oligarchs (poor fellows) who have been buying property left and right on the French Riviera.

    What would the nightlife in Cannes and St Tropez be this summer without them … ? ;^)

    1. MyLessThanPrimeBeef

      Again, property sellers in the French Riviera, like the rest of the world, would need rich Chinese communists to come to the rescue, no doubt, after rescuing other French chateau owners.

  13. Fiver

    As this was a coup conducted by far-right Ukrainian ultra-nationalists blessed by John McCain, with Victoria Nuland’s stooge “Yats” riding herd as a ‘moderate’ (even if a hysterical fool), I suggest Putin will emerge unscathed, and precisely because the US neocons have again demonstrated such colossal arrogance and stupidity – they continue to act as if nobody had outed their devious plotting, as if the Internet doesn’t exist (meaning if we know, then certainly governments around the globe know) and as if the world isn’t so sick of this neocon crap the US is courting the creation of a countervailing power alignment.

    In fact, the US has alienated virtually all but the rest of Anglosphere, and even in the other 4 of the Five Eyes, is viewed as a rogue State by significant portions of their respective populations. That is not enough to ‘manage’ global affairs. The US needs Germany, Japan, China, Brazil, India and others as partners – and you don’t treat partners with their own key interests the way the States just treated Russia.

    Every new push towards complete hegemony built on massive untruths and fascistic actions adds mass to the counter-move that will eventually come. Israel is not the only rogue and the world no longer needs US goods, capital, expertise, etc. This campaign to ‘get Putin’ because Putin prevented Obama’s obliteration of Syria is a puerile tantrum that will soon run out runway. One can only hope Obama dials the outlandish rhetoric back, agrees to talks and resolves this along the lines already agreed to, but de-railed by the armed neo-Nazi thugs who decided to physically overthrow the regime in Kiev.

  14. allcoppedout

    Russian and Chinese oligarchs (thieves) have poured money into Western Ponzis. I remember when Moscow Gold on this scale would have been seen as a KGB plot to bring down western economies. These days one can imagine Vlad having a meeting with his favourite impalers suggesting they invade Crimea in order to crash the rouble and Russian stock market in order to buy up in the ensuing fire sale with the offshore loot.

  15. ReaderOfTeaLeaves

    Great comment.
    Obama needs to turf out the neocons still embedded in US government agencies, and America needs to take a hard look at what the neocons continue to perpetuate after 30 years of skulduggery, going back before Iran-Contra.

    I never dreamed that Putin would end up as the cool-headed statesman – the spectre is clearly making the neocons and their FOX-related minions hyperventilate and foam at the mouth.

    Stateside, I can’t stand to hear one more asinine, bellicose claim about Obama being ‘weak’ made by the likes of McCain and the rest of the neocon asshats who voted for a couple of off-the-books land wars in Iraq and Afghanistan. These fools are hitting a new low in imbecilic irresponsibility; they’re basically cheering on the prospect of nuclear confrontation, which is a form of sedition In my book.

    It’s galling, as a Yank, to learn that a so-called ‘diplomat’ is saying “f— the EU”, and actively stirring up what appear to be neo-Nazis in a region where there are many nuclear weapons. If this kind of insulting, obnoxious conduct by a US ‘diplomat’ – along with the preening, unctuous Kerry – is what we’re getting for our State Dept dollars, we are screwed.

    At this point, we’d better hope there are calmer, more pragmatic heads prevailing in the Pentagon. At the very least, they surely recognize the consequences of insulting other nations. Those in the Dept of State who can’t get their heads around this simple fact need their asses handed to them on a platter – and the sooner, the better.

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