'London Falling'

Ilona Billington wrote an article in the Wall Street Journal today that was about housing prices in the U.K. Apparently they are the lowest they have been since April 2009. This is likely due to the Banks' hesitation to make housing loans. With access to credit being restricted to potential buyers, the demand for housing shifts down and average price falls. However there is an opposing force at work here as well! Sellers are as cautious about buyers as banks are, so they are holding off on posting their properties for sale until the housing market climate clears. With reduced demand on the buyers' side and reduced supply on the sellers' side, transaction activity is predicted to level out for a while.
The article does not address whether or not London is feeling the housing price drop to same extent as the rest of the U.K. which interests me because London has the most expensive realty in the world! Demand for property there is so high, it's amazing. Which brings us to an interesting economic phenomenon of restricted supply.
When a city becomes a desirable location to live, people flock there. Take Chicago for example. If you want to live right next to the office building you work in in downtown Chicago, you will have to pay like crazy for it. Most people would rather live a little farther away and commute to work. When those areas fill up, the price for property goes up there, and people are willing to move slightly farther away and commute a little longer. However, it is still worth the money they save. As demand for property increases farther and farther away from downtown Chicago, the higher prices get in each subsequent section. This is the reason for Chicago's vast expanse of surrounding suburbs.
Back to London; London is surrounded by what is called the "Green Belt." It is a swath of land surrounding London that is protected so as to keep the area from being developed. This means there can be no vast expanse of suburbs like Chicago has. So London's population has a cap at around six million people due to the scarcity of land. And since it is such an epicenter of business, culture, fashion, etc, the demand continues to increase for a fixed amount of land, increasing prices to outrageous proportions. Perhaps London is still subject to the U.K.'s falling property prices, but if so, I would assume it occurs at a lesser rate.

Reference: Tim Harford, "The Undercover Economist" (2005)
(Posted by Trevor Murphy-Mannix)