I am not an expert in the housing market, so I wanted to ask your opinions. Is this price rise in London sustainable? I look at the price declines in the USA and Japan and ask why the UK is different?
Of course prices are not sustainable. The average salary in London is approximately £30,000. If you want to live in an area that doesn't have alcoholics and gypsies defecating in your front garden a house will cost half a million pounds. Loans to income levels are ridiculous.
Exactly. House prices in London and many other major cities in central Europe are excessive and are likely to come down substantially (adjusted for inflation) in the foreseeable future. I think the magnitude will be between -60% to -80% for the most expensive locations.
A good measure for real estate valuation levels is the ratio of cost to buy vs. cost to rent which determines the possible return you can get from an investment in real estate. That measure is at record highs for the top real estate locations in Germany like Munich for example. This means that an investment takes much longer to amortize and generate a positive return today than in the past.