FT says London properties are bargains for foreign buyers – but are they right?

Here is the link to the  FT article

They observe correctly that prices have fallen in London’s premium sector and we discussed why that was in the previous post.

What bothers us though is that they seem to suggest that because properties have become cheaper for foreigners due to a fall in Sterling, this somehow makes the properties worth buying.

Why does this bother us? A drop in sterling is the world saying that it thinks Britain’s economy is going to struggle. As home prices don’t grow in struggling economies, the world is effectively saying that British property prices are not going to grow.

Why is this relevant?

It is relevant because of the reason investors buy property. They invest for a return and if property prices don’t go up, they can’t get a return (unless they rent it out but most luxury properties are not rented). So all in all, if British property prices are not going to go up, then how can it be a bargain? Indeed, even if prices were to halve and then not go up, would property be a good investment? No. If the price of an asset does not go up, it is not a good investment at any price.

A country’s currency is like a company’s share price. When the market thinks a company will do badly, the share price drops. When the market thinks a country will do badly, its currency drops. The FT seems to suggest that if a company’s share price goes down due to something fundamental (like Brexit) this means it is a good reason to buy. If that is what they are suggesting, we don’t agree.

Of course, the market could be wrong about Britain. It is often wrong about companies and if you know something the market doesn’t, you can get a bargain, but such an approach brings with it a lot of risk.

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