What the Bike Taxi Driver Told Me in London

On a trip last week to London, England I was shocked on three fronts. I was surprised to see how expensive property has become in London and surrounding areas. I was further surprised to see, despite the Bank of England’s steady rising of interest rates, that demand for property continues. Most importantly, I was shocked to see how everyone is getting into the real estate market. It really sounds and feels like the speculative top.

For fun, I took one of my kids on bike taxi ride from Piccadilly to Hyde Park. A bike taxi is a vehicle where two people sit in covered canopy seats at the back while at the front of the vehicle a cyclist basically pedals a large three wheeler.

Anyhow, I remarked to the young bike taxi driver, “Gee…property prices sure are rising here in London.” To which the 25-year old replied, “I just bought a very small home one-hour outside London for 174,000 pounds (about $310,000 U.S.).” “Does the bank finance much of that purpose?” I asked.

“I put 5% down and got 95% financing. I plan to rent the basement to help pay the mortgage. Needed to get into the market you know… property prices will just keep going up here forever… I’m really working hard to buy another with a friend.”

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I told the young man how property prices don’t always go up. “In the country where I come from, property prices fell drastically in the early 1980s,” I expressed. The reply came, “Not here. In England, property prices go up 8% per year, minimum.”

“But have you heard about prices declining in major cities in Australia? And what above rising interest rates? Hasn’t the Bank of England raised rates five times now?”

“Doesn’t matter. This is England. Property prices rise 8% a year. Now where did you say you wanted to be dropped off?”

There was no convincing the young man. And this is very characteristic of many people entering the London area property market. Prices have risen so much in London; people are buying homes one-to-two hours outside London and paying record prices there.

Here’s the reality in England this young man is likely not aware of, nor interested in hearing:

— Consumer debt in England has just hit 1 trillion pounds. A record high.

— Mortgage payments there account for 28% of consumer take- home pay.

— 240,000 home owners in England are struggling with debt… or what a building society calls “regularly having difficulties” after five interest rate hikes.

— A survey by Financial Services Authority found that, after the rate hikes, 38% of the consumers questioned in their survey said they would “struggle with at least one form of borrowing” while 6% actually said they would fall behind on their payments.

The clearest way to see when a market has reached a climax, and to which lower prices lie ahead, is to gauge speculation. Whether it be the stock market, real estate, gold or tulips… when speculators hit a market hard, the fall is never far off. And in my opinion, that’s what is happening with England property right now.

You may even remember the old adage about the tycoon who took a cab ride in 1929 and decided to sell all his stocks when he got to his office because the taxi driver had dispensed so many stock tips on the ride over. Human speculation for fear of being “left out” never changes.