Bubble Stock for Sale

It is hard to imagine, much less find, a better exemplar of how capital gets misallocated in a bubble than British property agent Foxtons, whose stock was publicly listed last week.

The London-based Foxtons, which only three years ago was taken over by its lenders, went public last Friday and by the end of its first trading day was worth US$1.2 billion. That's a bit more than double what it sold for in 2007, just before the crash, when its founder Jon Hunt sold out to private equity firm BC Partners in a deal that, at the time, was widely derided as marking a market top.

To put it in perspective, Foxtons is now trading for a bit more than 20 times what investors expect it to earn next year. That implies investors believe that either it will gain market share rapidly or, as real estate agent fees are a percentage of sales and rental prices, they think London real estate will continue its stratospheric rise.

How Foxtons came to command such a premium price, its journey on the way, and the policies and forces that got it there form a very short tour of what has gone wrong in Britain over the past decade and a half.

House prices in London have more than tripled since 1998, rising far more than incomes and driven by a complex combination of forces. While difficulty getting planning approval has played a role, as has London's popularity with rich foreigners seeking a bolt-hole against political risks at home, much of the gains have been driven by the financialisation of the British economy.