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Feature: Is London cooling?

London has historically been more expensive than the rest of the UK but a lack of new homes, poor affordability and Brexit could hit the market harder than the rest of the UK

Fans of The Clash will be familiar with their hit song of 1979, ‘London calling’, which has been used to enhance many a marketing campaign over the years. However, ‘London cooling’ would better describe the capital’s housing market these days.

Brexit uncertainty, tax hikes and what some believe is a nat­ural correction are all offered as reasons for stalling prices. Many believe the capital – home to more than eight million people – may have to get used to this new normal until political and economic certainty is restored, because its high prices make it more susceptible than most areas to affordability pressures, which lessens demand.

Nationwide chief economist Robert Gardner says: “In London and the South-east, affordability has become even more challenging, with more people priced out of the market.”

The Nationwide house price index revealed a 0.5 per cent fall in the capital’s property prices in 2017, with London the only region to record a drop last year.
Yet before wannabe first-time buyers jump for joy at the thought of tumbling prices, we are talking about a gentle cooling, not an Arctic blast. London, after all, is still by far the most expensive region in the country. The average London house price is still a whopping 14 times the average salary in the city.

Data differentials

Nationwide says that by the end of 2017 the typical price in the capital was £470,922. At the end of the first quarter of 2014 the figure was only £362,699, showing a remarkable 30 per cent rise in less than four years.

While some indices report a slight price drop, others show values still rising, albeit at a slower pace than in previous years and at a lower rate compared to other regions.
According to the Halifax index, London prices rose by 2.6 per cent last year, but that was down from a peak of 21 per cent in Q1 2016. Most indices show the capital as the weakest-performing region over recent months, and many think the trend will continue.

Property portal Rightmove reports a 1 per cent annual decline in London asking prices for the year to January, although it says the fall would have been worse were it not for a shortfall in supply. It says that, in zones 1 to 3 — from central London to the likes of Highgate and Tooting — new listings in January were down by 4 per cent annually. Rightmove director Miles Shipside says: “Some would-be sellers are holding back, preventing a glut of competition from forcing prices downwards.”

Lack of supply is not a new story for London, albeit the narrative usually centres around too little construction. Mayor Sadiq Khan said in November 2016, as part of his ‘Homes for Londoners’ report, that “in recent years, London has built nowhere near the number of new and affordable homes we need. As a result, too many Londoners can’t afford a decent home to rent or buy”.

That lack of supply has helped to keep prices high over recent years, so it will take a much bigger fall to reduce the huge average house price versus income ratio that exists in the capital, to help wannabe FTBs.

Aspiring London homeowners may not see much benefit from the FTB stamp duty abolition for homes costing up to £300,000 announced in November’s Budget, nor in the reduction on homes sold for up to £500,000. This is because a larger proportion of properties are above the thresholds compared to those in the rest of the UK.

Research from online estate agent HouseSimple in January showed only 387 properties for sale in zones 1–2 below the magic £300,000 level, rising to just 1,235 in zone 3. For homes valued at £300,001–£500,000, there were just 7,687 in zones 1-3 that were eligible for a stamp duty cut.

Prime central London market is bottoming out

HouseSimple.com CEO Sam Mitchell says: “Unfortunately for the young London buyer, the stamp duty cut won’t make much of a dent in their housebuying budget.”

Estate agent Savills’ data highlights that the drop in prices has been most acute in the most expensive parts of the capital — areas where the majority of FTBs cannot dream of owning a property. It shows a 4 per cent fall in prime central London prices in 2017, a 4.2 per cent dive in prime South-west London and a 3.3 per cent drop in prime outer London.

Savills adds that, among these micro markets, the outlook differs. Its head of residential research, Lucian Cook, says: “The prime central London market is bottoming out but we don’t expect a return to growth until there’s greater Brexit clarity. Our forecasts anticipate it will be two years before we see a bounce in values.

“We expect continued weakness in key outer prime London markets, and are forecasting small falls next year. These markets are more dependent on domestic wealth generation and access to borrowing than prime central London. As such, our forecasts are for much more modest price growth over the next five years.”

So what is in store for London as a whole? Halifax managing director Russell Galley says: “House price growth in 2018 is likely to be weakest in London and the South-east.”

Mitchell adds: “The UK property market is no longer all about London, which is no bad thing. But the impact of a hard Brexit is likely to hit the capital harder than anywhere else.”

This narrative is the opposite of what we are used to hearing. In September 2017, Nationwide reported that London house prices had fallen year-on-year for the first time in eight years. By contrast, in March last year it had revealed 5 per cent year-on-year growth, making the decline a recent phenomenon.

If the London market is to return to an upward trajectory, certain conditions need to be favourable, according to Savills. Its head of London research, Katy Warrick, says: “Growth will be reliant on London-wide earnings growth, the ability to attract international wealth and infrastructure, and regeneration.”

Rental sector

Houses, house, property, monopolyWhile London house prices tend to grab the headlines, the rental market displays similar characteristics to the homeownership sector. Rents are the highest in the country, but they have been falling in recent times. Peer-to-peer lending platform Landbay says until December last year average London rents had fallen slightly every month since May 2016, when they hit a record figure of £1,893.

In January there was a small monthly rise of 0.03 per cent, to £1,876, but this was still an annual decline of 0.54 per cent.

Looking deeper into the reasons for the fall in buying prices — which underpin the rental sector too — experts point to a number of factors. The first is simply that the market was due a correction. After all, for how long can prices continue to rise while so many Londoners cannot afford to buy?

Demand from overseas investors has propped up the market for many years, it is claimed, but some argue that cannot go on indefinitely. Shipside says: “Rapid price rises in recent years have resulted, as usual, in a readjusting market.”

Mortgage regulation, which has made it tougher to borrow, is also cited as a reason for London’s house price problems because its properties are so expensive.

“Regulation is likely to continue to act as a drag on the capital’s house price growth over the next five years, especially as interest rates creep up and the mandatory stress testing of affordability becomes more of a constraint,” states Warrick.“It is holding back borrowers from taking on excessive levels of debt. This has slowed the market.”

Political influences

Then there is Brexit. The political and subsequent economic uncertainty since the June 2016 vote to leave the EU has created problems that hit pockets countrywide, whether because of rising inflation, a lack of confidence or other factors.

In London, with prices so high and natives having to stretch further than most in the UK, the effect can be more dramatic and is causing even more would-be buyers to look beyond this urban melting pot.

Garrington Property Finders managing director Jonathan Hopper says: “The capital’s prime areas are seeing a flight of equity beyond the M25 that’s sucking the momentum out of price rises. Affordability remains the single greatest challenge for many would-be homeowners.”

Another question facing London is whether it will continue to attract the overseas investment that has been central to house price growth, particularly with Brexit uncertainties and the greater tax burden facing landlords.

“The high tax environment means that even international buyers are reluctant to take advantage of the currency play,” warns Cook.

In some respects there are few winners among both homeowners and would-be purchasers in the current climate. FTBs still struggle to get on the housing ladder, while those with an existing property wonder nervously what will come next for
their investment.

Will the London housing market freeze over completely, or start to thaw? Multiple factors make it hard to predict.

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