As the saying goes, when a man is tired of London he is tired of life. This is as true today as it was when Samuel Johnson first said it, and is reflected in London's continuing popularity with businesses, tourists and the thousands of people who flock to the capital to live and work each year.
In a recent speech at London's own mini-Manhattan on the Isle of Dogs, Chancellor Gordon Brown praised the capital's internationalism, its adaptability and its enterprise. He pointed to London's strengths – a pool of skilled and flexible labour, competitive personal and corporate tax rates, the concentration of financial institutions where business can be carried out at globally competitive rates, and highly specialised markets and services that are given the freedom to develop.
With so many people jostling to get into the capital it's no wonder that the London housing market has thrived over the past 10 years with house prices rising a whopping 247%. The average house price in London is now £232,420, compared with £140,000 in the rest of the country.
As Simon Bucknell, business development manager at Chelsea Mortgage Management, points out, while other areas are catching up fast, the defining characteristics of London will always make it stand out.
“There will always be a level of disparity between what you pay in London and elsewhere,” he says. “People must remember London is almost a country within a country and has its own economic issues.”
That may be but the streets are certainly not paved with gold. The cost of living has gone through the roof – and that's before you even get round to the problem of trying to put one over your head. But despite the obvious difficulties that London presents to anyone hoping to live there, the sheer number of job opportunities at all levels makes it difficult to resist.
Over 20% of searches in March on housing development website www.new-homes.co.uk were in the South-East region, with London being the most popular choice.
But with property and space at a premium, cost is all-important. For first-time buyers London can be a harsh environment in which to take that first step. The problem is that everywhere is expensive. Prices in the suburbs and Home Counties are on a par with London boroughs.
You then have to weigh up the additional costs of commuting. With the capital's roads, trains, tubes and buses irregular at best and infuriating at worst, this is an important consideration for homebuyers. But with so many jobs located in London and the South-East, many buyers are left with no choice but to pay the exorbitant prices.
"Even in Hitchin, Hertfordshire, we're seeing areas deemed the 'right places to be' and equivalent properties not far away marked down," says Kevin Morgan, managing director of EZI UK. "Clients are becoming more discerning. There is a flight to quality.
"London has always attracted new money. We see successful people coming in to London to set up business and this filters down."
It is clear that London has been a goldmine for those who invested in property since the last market downturn ended and prices began to rocket. But how do you define this? Does it vary by borough or even by street? And how long can the boom continue?
Tom Bland, associate at Savills Private Finance, says the market has to be broken down. "There are some areas that will definitely do better than others in the future," he says.
"Places such as Clapham, Fulham and other south-western areas have gone as far as they can for the time being. But there are areas further east and south such as Canary Wharf and the Thames Barrier region which retain a lot of potential."
But space constraints will remain and the capital's property seems destined to stay on top, particularly in built-up areas where restrictions are most extreme.
"The one thing we can't do in
London that they can do in Manhattan is to knock down a 60-storey skyscraper and rebuild it at 120," says Simon Nimmo, managing director at high net worth brokerage Charles Cameron.
"In prime parts of town like Mayfair or Belgravia there is a finite amount of property and you can't create much more. You can't build upwards with skyscrapers but there is an increasing demand for living in the best parts of London, with a housing stock that is simply not sufficient to cope. That should ensure that prices continue to rise."
Put like this, it seems a simple equation for investors. London has always attracted the international jet set, from the business elite to the latest fashion and film stars. The names and nationalities may change but the UK and London in particular have always attracted a well-heeled clientele lured by a combination of history, attractive properties, adequate local infrastructure, good shopping and good schools. The recent well-publicised Russian 'invasion' is a good example, led by the super-rich owner of Chelsea FC Roman Abramovich.
But there are also more homegrown millionaires in the UK than ever before. "These days you can't get an awful lot for a million pounds," says Morgan. "There's a finite number of properties available. As a nation we are getting wealthier and it's only natural for these people to seek out the best places to live. There are more millionaires here now than there have ever been and the number is set to grow."
All this is great news for the high-end investor - attractive properties which should retain their value.
And while there is a lack of space, builders and architects have become particularly skilled at working around the restrictions.
"Although there is a lack of space in London, there always seems to be a development happening somewhere. Developers are always finding space, be it a conversion or an old building," says Bland.
"For example, the police are now selling off the property they own to move in to smaller more modern facilities. Maintenance costs are too high. Although there's a lack of space and you think they'll never be able to find any more, someone is always building something new." But the high level of property innovation taking place also highlights a problem that lies at the heart of the London housing boom.
While the police force is perfectly within its rights to sell off its stock of affordable housing, the upshot is that a key London public service is further limited in the housing it can provide for its workers. While there's no doubt that the vast majority of police officers would be none too pleased to be saddled with communal living quarters, it's rare that you hear of the revenue generated from these public sector sales being used to fund affordable homes elsewhere.
Research from Halifax shows that despite innovation there is a chronic lack of new developments in progress. The government-backed Barker review looked at this problem, albeit on a country-wide level. The proposals by the Office of the Deputy Prime Minister to expand the number of houses along the Thames corridor is one approach being tried to address concerns in the region.
"Looking at London and the South East our numbers show that this is not merely a case of shortage of supply," says Halifax spokesman Paul Fincham.
"There has been a decline in new homes building over the past 15 years which equates to a cumulative shortage of half a million homes by 2021 - obviously there's a lot of ground to be made up."
The government is already working towards additional methods of alleviating the housing problem in London. In his Budget, the chancellor outlined plans to relocate 20,000 civil servants out of the capital and into outlying regions of the country.
"London is always going to be population-dense," adds Fincham. "The 20,000 jobs are the first tranche and there are likely to be more according to the review. We are seeing the decentralisation of government departments as a reaction to the cost of land and housing. Everything is expensive in London but those jobs could boost regional economies."
This is certainly one way of trying to cope with an over-populated area but in the grand scheme of things it is unlikely that initiatives such as this will have a major impact. And while few would see it as completely recession-proof, London's extreme supply versus demand dynamic does appear to insulate it against market wobbles.
Or is this just wishful thinking? House prices last year actually increased more dramatically in the regions well away from London. Halifax even dubbed 2003 the 'Year of the North'. Could it be that that the London market has peaked?
Andy Pratt, managing director at Alexander Hall, sees the market remaining stable for the time being and says attention has switched elsewhere over the past year.
"I think the London market has become less important," he says. "There has been a steady increase in housing prices around the country and the capital has become less of a dominant driver in the national market. But my view is that if there is going to be a house price correction, it is more likely to hit outside London than in the capital."
And looking at the types of mortgages City brokers are doing, there are signs of a changing market.
"We've experienced a trickier market in the first quarter of 2004 and lending volumes are marginally down against the first quarter of 2003", says Andy Wilgoss, managing director of Square Mile Mortgage Finance.
"Whilst remortgage business remains fairly constant at around half of our total business we have seen buy-to-let accounting for a larger proportion of purchase business this year as compared with last."
"The buy-to-let doom-mongering appears to have been unfounded. Although most of our clients live in London and the South-East, we are seeing a greater willingness to invest in other parts of the country.
"February's interest rate increase, a spate of downward valuations and an increase in unplaceable first-time buyer deals have also contributed to an interesting first quarter."
But Jonathan Cornell, associate director at Hamptons International Mortgages, says while the top end of the market is incredibly buoyant with a London apartment recently selling for some £27m, other markets - particularly the rental sector - are looking less rosy.
"It's really difficult to do buy-to-let at 85% at the moment because there's such a huge supply of this type of property. Rentals are definitely depressed right now."
This is a market becoming less attractive to investors and more difficult for new borrowers to get anywhere near, against a backdrop of increasing rather than decreasing house prices. Hometrack has predicted rises of 13% over the next year, Nationwide has adjusted its predictions up from 9% to 15%.
The market is confounding expectations. Bradford & Bingley, Charcol and The Marketplace predicted a rise of around 5% at the start of the year.
Walter Avrili, head of mortgages at Charcol, now believes that estimate was too conservative. "It's all about supply and demand. Even another base rate rise won't slow the market down."
But more could still be done by both the government and the lenders to help first-time buyers. The government's key workers initiative, which gives between £50,000 and £100,000 to key workers living in London, is a start. Long-term fixed rates with more flexible income multiples, such as GMAC-RFC's 25-year fixed rate mortgage or Mortgage Express' Step Ladder mortgage, though both have now been withdrawn, are at least early signs of a more flexible approach from lenders.
"Product innovation is the key and the more we pressurise lenders to offer first-time buyer products - particularly in high cost areas where people can't afford to buy - the better," adds Avrili.
The capital is at serious risk of shooting itself in the foot if house prices rise out of proportion with the purchasing power of first-time-buyers. Those with well-paid City jobs or a couple of million pounds in the bank are always going to be able to cope with market shifts, be they upward or downward. But the same is not true of those stuck on square one, in particular first-time-buyers. As Avrili says, lenders and the market ignore this core sector at their peril.
"It is a crucial part of the market," he says. "It's not just this year's problem as first-time buyers in 2004 are second-time buyers in 2006 and 2007.
"If you haven't got them, the whole market is in trouble. That is the main worry for the London market over the long-term."
A city that continues to buck the UK trend
Jonathan Cornell is technical director at Hamptons International Mortgages
In the past couple of weeks Hometrack, Nationwide and Halifax have released reports indicating continued house price inflation across the UK.
I am becoming increasingly sceptical of the headline figures that appear in these independent surveys as London invariably bucks the national trend.
Hamptons' own scientific and anecdotal experience in the capital also contradicts some if not all of this independently produced information.
Hamptons has 15 offices in what you might call flagship London locations such as Kensington, Knightsbridge and Chelsea. This admittedly concentrates our findings on the £500,000-plus market but with a further 20 offices sited in near London locations such as Weybridge and Caterham it's still possible for us to take the pulse of the M25 perimeter.
During 2002 and early 2003 there were measurable falls in property prices across much of Hampton's footprint especially at the sophisticated end of the market in areas such as Knightsbridge. This deflation occurred at a time when national surveys were quoting increases. It was pretty challenging trying to explain to, say, remortgage clients, that their property was not worth what the property next door sold for a year earlier, let alone managing the expectations of buyers who did not know which commentator to believe.
Since then of course London has rebounded with price rises of 7% so far this year. One individual's recent purchase of a flat for £27m is a bold statement of confidence in the region.
There are some meaningful characteristics that apply to the London market that are never fully reported. March saw record transaction levels for Hamptons with property viewings up 17% on last year. 76% more sales were agreed and the number of exchanged deals was up 147 %. But there is presently a frustrating shortage of stock which is fuelling price rises. And transactions are taking longer to complete than ever before, partly due to the slow-moving legal process at this time of year but more critically due to the aforementioned shortage of stock.
Many vendors under offer are delaying the process as they are unable to find suitable properties to move into.
It is this stock issue that will be most critical to the London market over the next six months though there are signs that the anticipated surge of new stock post-Easter will materialise.
However , I would sound a note of caution to any vendors holding out in anticipation of higher prices. My belief is that prices will level off and indeed I hope they do. As a mortgage broker, liquidity and transaction levels are what pay the bills, not rampaging prices.
Capital FTBs need enhanced income multiples
Mary Sung is product development manager at Mortgage Express
We're all familiar with the plight faced by first-time buyers: in February 2000 they comprised 39% of homebuyers but by this year that figure had dropped to 30%. And with no relief in sight – Nationwide recently increased its projected price growth for the market to 15% for this year – the hardships for first-time-buyers look set to continue.
Nowhere is the problem more pronounced than in London. Consider the fact that of the 26,000 first-time-buyers in the UK last February, 4,000 were in London.
Worse still, although the average price of property in the UK recently broke through the £100,000 mark, the average purchase price in London is 70% higher at £170,000.
Londoners generally get paid more to compensate for the higher cost of living.
The average income of a London first-time buyer is £40,750 which is well above the national average. But this is hardly sufficient to make up for the cost of living in London, let alone buying property there.
Although the issue of income multiples is relevant for all first-time buyers, it is of particular significance in the London market. 18% of London FTBs take out loans using 4 x income or greater, compared with only 8% two years ago. This figure is higher than the UK average which is 12%. The message is clear – London first-time buyers need enhanced income multiples to make up for the specific circumstances of the capital's property market.
Stamp Duty is another restrictive factor for first-timers in London. The UK threshold for Stamp Duty is £60,000, a figure that has remained unchanged since 1993. In light of the growth in the property market over the past decade this figure is ludicrously low, particularly considering the cost of London property. If the threshold had been index linked it would now be at £150,000 and catch far fewer first-time buyers.
The acute housing shortage, as detailed in the Barker review, is another problem. In most areas of the UK, housing demand is outstripping supply but in the crowded capital this trend is even more extreme. The number of new buyers registering with London estate agents is up 8.4% compared with an increase in the supply of new properties for sale of only 4.7%.
But it isn't all bad news. On March 23 this year, the Office of the Deputy Prime Minister launched a new housing initiative. The Key Worker Living scheme is worth £690m and is designed to retain the skills needed in frontline public services such as education, health and community safety by helping people that have been priced out of the market. The scheme will focus on expensive areas of the country such as London and will provide relief to at least some FTBs.
London is a city of extremes and nowhere is this more evident than in the property market. The government has acknowledged that without greater intervention, more and more people hoping to buy property in the capital will fail to achieve their aspirations.
There could be a regional housing shortage of half a million by 2021
Paul Fincham is a spokesman for Halifax
House prices in the capital paused for breath during 2003 with the main increases in UK house prices being seen outside the M25 area. The annual rate of house price growth in London at the end of 2003 stood at 8.6% – around half the UK average rate of 15.4%.
However, house prices in greater London have risen by over 50% during the past three years and have doubled since summer 1997. Low interest rates and continued gains in employment have provided a positive backdrop while the trend of demand outstripping supply has been a major factor supporting house price inflation in the region.
Halifax expects house prices in London and the South-East to increase modestly during 2004. House prices in the London mainstream market – properties up to £250,000 – are expected to grow by approximately 8% during 2004. That's about the same as 2003 but still below the long-term regional average of 10%.
In line with this the North/South divide, which narrowed significantly during 2003, will continue to narrow this year before re-asserting itself in 2005. Our figures show that at the end of 2002, the average property in the South cost three times as much as in the North. By the end of 2003 the average property in the South was around 2.3 times more expensive than in the North.
First-time-buyers in London and the South-East continue to face difficulties.
The number of first-time buyers dropped 30% in Greater London in 2003 to 48,000.
More than 85% of towns in the South-East and Greater London were unaffordable for first-time buyers in 2003. And affordability is unlikely to improve in the short-term with house price growth forecast to exceed earnings growth.
Looking forward, we see trends which should prove supportive for the London housing market. The lack of quality housing stock in the UK, particularly in London and the South-East, is contributing to upward pressure on house prices.
Although the recommendations of the Barker review should help free up supply, the impact of the report will not be felt for a number of years.
If current rates of house-building are not increased in London and the South- East and the decline of the past 15 years reversed there could be a cumulative shortage of dwellings in these regions of around 500,000 by 2021.
These shortages go a long way towards explaining not only why houses cost more in this region – but also why it is this region that tends to lead the way in national house price trends.