London house prices linked with political uncertainty overseas

House prices in London have a direct correlation with political turmoil in particular parts of the world as investors look for safe havens for their cash, according to an Oxford University study.

Professor Tarun Ramadorai and Dr Cristian Badarinza, from the Saïd Business School, have devised a way of calculating the effects of 'safe haven' demand on the prices of a number of assets, which they test using data on London house prices. This calculation could also be used to look at a range of other assets such as gold, real estate in other major cities of the world, or international equities, they suggest.

'The seeming invulnerability of London’s property market has long been assumed to be a result of its status as a "safe haven" – an investment location in which assets will retain or even increase their value in the face of turbulence in other parts of the world. However, for the first time we can back up that perception with rigorous, empirical research on the issue,' said Professor Ramadorai, who is also an Executive Committee member at the Oxford-Man Institute of Quantitative Finance at the University.

Professor Ramadorai added: 'The granular level at which we have analysed the data allows us to confirm that safe haven demand effects from Southern Europe, China, the Middle East, Russia, and South Asia are indeed important factors that help explain the dynamics of London house prices.'

The research takes the simple approach of sub-dividing London into electoral wards. The researchers linked each London area with specific foreign countries by the share of London residents in the area that originate from those countries. The research finds that increases in political and economic uncertainty in specific foreign countries strongly predict price rises in their linked London areas.

The research looked at millions of house price transactions using data spanning 15 years from the Land Registry, the Office of National Statistics and the Nationwide Building Society. When this was combined with data recording international economic and political uncertainty, they were able to identify the effect.

They found that, on average, in parts of London with a one standard deviation higher share of residents originating from a particular country, house prices were nearly half a per cent higher in months following a one standard deviation increase in that country's annually measured political uncertainty. This 'safe haven' effect was found to be over and above the wide range of standard house and location characteristics generally associated with higher house prices.

Price responses to uncertainty in different world regions were not uniform. The researchers argue that this could be because some purchases are purely driven by the desire to move capital to a safe haven, without the buyer planning to relocate. Other purchases may be primarily driven by the buyer wanting to live in London at some future date.