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Capital gains

London property has been made massively expensive because of the growing demand from UK buyers. That and overseas money flooding into the capital means the streets really are paved with gold

“When a man is tired of London, he is tired of life; for there is in London all that life can afford.” Those were the famous words of writer Samuel Johnson in the 18th century.

Johnson, however, may have tweaked that comment had he been alive today, given the most precious purchase many will ever make – their home – will cost more in London than anywhere else in the UK – and by some margin.

But Johnson’s assertion that the nation’s capital is loved would probably still stand.

For London is not only the property centre of the UK but the huge demand from overseas buyers to purchase houses and flats is helping to further inflate the bubble that has made the city mightily expensive. So what is it that makes London such a hive of housing activity and just why are prices so much higher than the rest of the country? And what is the outlook for the future?

The average cost of a property in London is currently about £310,000, according to Halifax, 79 per cent higher than the nationwide average of £174,000. This is fuelled by massive demand, a lack of supply and cheap mortgage rates, whether due to low interest rates or more recent initiatives such as the Funding for Lending Scheme. The picture, though, is nothing new.

The pull of London

Halifax says the disparity was greater in 2001, with London property prices, on average, 85 per cent higher than the rest of the UK.

A big reason for the boom in prices in the capital is not just a result of huge demand from locals but also due to overseas buyers flooding the market.

Just look at brochures for new developments in the capital and you will see images of famous shopping streets and landmarks, even if miles from the site itself. 

The typical profile of a London buyer is someone from overseas who is often well educated on the market

These are not to entice locals – who will be fully aware areas such as Battersea or Willesden are a long way from the Oxford Street lights often featured in literature – but instead overseas investors. 

“London has a large pull for clients coming in from overseas,” says Brian Murphy, head of lending at the Mortgage Advice Bureau. 

“The typical profile of a London buyer is someone from overseas who is often well educated on the market. They  are extremely clued up on what is going on in the market.”

Money is no object to most of these investors and they look to places such as Mayfair and Kensington as safe options to invest in.

London is seen as the capital of the world and, due to its geographical location, is able to operate across the financial markets when Asia is still trading in the early hours of the UK day, with Europe throughout the day and later in the afternoon/evening when US markets have opened. 

“Overseas buyers are drawn by the investment potential the UK offers, the stable political and economic climate, access to the leading schools and universities and the history and cultural opportunities that London offers,”  says Murphy.

The overseas boom is particularly evident among new-build purchasers, says Naomi Heaton, chief executive officer of fund management firm London Central Portfolio.

While the view that overseas investors are a major reason for the boom in London house prices, some suggest demand from abroad is limited to ultra-prime areas such as Belgravia, Chelsea, Kensington, Knightsbridge, Mayfair and Notting Hill.

“Overseas purchasers, a mix of both investors and owner occupiers, have had a significant impact on prime Central London and some of the surrounding areas but much less on the rest of the city,” says Johnny Morris, head of research at estate agent Hamptons International.  

“These wealthy foreign purchasers have propelled prices in Kensington & Chelsea and Westminster to 40 per cent above their peak levels but in a city that is home to more than eight million people, their impact on the rest of the capital is limited.”

Property advisory firm Assetz’s chief executive officer Stuart Law says international buyers in London have helped drive up prices and currently represent 75 per cent of all sales above £700 per square foot in prime Central London.

“The majority of buyers come from the Far East, are cash buyers and have bigger budgets than Londoners living and working in the capital,” he says. “However, these buyers aren’t yet rippling out to Greater London, with demand remaining centralised at present.”

Impact on the rest of London

But even if foreign investors are mainly attracted to prime central London, this has a profound effect on the rest of the capital. 

Areas such as Notting Hill, for instance, were once among the least desirable – just witness the riots there in the 1950s. But now, Notting Hill, made famous worldwide due the film of the same name starring Hugh Grant and Julia Roberts, is a much sought-after address for locals and international investors.

A quick check on property website Rightmove on the area began with a £20m eight-bedroom house with a swimming pool to show just how high prices can reach. 

If homes there are now being snapped up by the wealthy, it naturally drives demand from others – who may include well-off individuals nevertheless priced out of Notting Hill – into neighbouring areas. 

As a result, nearby postcodes, such as those in Ladbroke Grove, Queens Park and Kensal Rise, have seen prices rockets – if not to the same extent. 

And it is predicted areas further to the west such as Willesden and Harlesden will soon follow, showing the ripple effect of overseas demand and interest from locals with plenty of cash to burn.

The majority of buyers are from the Far East, are cash buyers and have bigger budgets than Londoners living in the capital

Of course, the London demand boom is not just a result of international attention as many from across the UK descend on the nation’s largest city every year. After all, London is the UK’s capital, home to many prominent industries. 

And as it is home to more than eight million people in a relatively limited space, this creates supply problems. 

In fact, many argue the supply of homes is low, which helps to fuel a boom in house prices.  LCP, for instance, says central London represents a tiny pocket of real estate in the UK. 

According to the 2011 Census, total housing stock levels in Central London stood at 200,000 whereas total stock for the rest of England and Wales was over 23 million properties. In other words, Central London comprises less than 1 per cent of the total housing stock. “London has a far bigger supply/demand imbalance so price rises will be greater. People therefore rent for longer before buying due to higher prices and the larger deposits that are required,” says Law.

LSL Property Services commercial director David Brown argues that the property market in London is a distillation and amplification of trends across the UK.  

“Most fundamentally, the supply of homes is even more limited than in other regions, set against even more rapid growth in the number of households,” he says. 

“House prices in the capital have grown by 10.6 per cent over the last year, according to the latest LSL House Price Index – more than twice as fast as the rest of England and Wales.”

Difficulties for first-time buyers

Some may wonder if mortgage brokers pick up a reasonable level of business relative to the number of transactions in London, given the large number of wealthy individuals buying in the capital. 

After all, it is feasible that many may not need a mortgage, given London is home to much of the UK’s wealth. However, brokers insist the city is still a lucrative source of business.

“It is a fallacy that wealthy people don’t need mortgages and buy for cash,” says Jonathan Harris, director of broker Anderson Harris.

With borrowing available at such cheap rates, it makes sense to gear up and buy an even bigger house than you could otherwise have done and he says private banks are offering particularly attractive terms to entice the wealthiest borrowers, which are mostly accessed via brokers, so anyone working in this market is being kept busy.

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“The private banks understand that if they get someone through their door via their lending services, their wealth management side should be able to help with their investments,” he says.

“Borrowing against property can also be a wise move to assist with financial planning or for wealthy buyers from overseas to mitigate currency or tax risk.”

To help tackle the lack of homes, the Government announced earlier this month that it plans to build a new garden city in Ebbsfleet, Kent to add 15,000 new homes within commuting distance of London. 

Labour leader Ed Miliband bemoans the fact that Mayor Boris Johnson set himself an annual target of 40,000 new homes but Miliband insists that in 2013 only half that number were built.

The opposition leader has promised that a Labour government would build more homes, including in new towns.

One consequence of high prices is that first-time buyers struggle to buy in the capital, with the average age of someone making their first step on the property ladder high than elsewhere in the country. 

“London has seen a resurgence of first-time buyers although new buyers typically have to wait longer to buy in and around the capital,” says Brown.

The LSL First Time Buyer Tracker shows the average first-time buyer in London now needs to raise a deposit of £64,000 to get on the property ladder and had to wait until the age of 32 to buy in London compared with 31 across England and Wales.

Initiatives to help boost the market may not have fed through to the London market due to high prices. For instance, when the Government launched its stamp duty holiday in 2010, which allowed those buying a property for £250,000 or less to pay zero land tax, many London homes would have not qualified. 

And even though wages are higher in London, they have not kept up with the growth in house prices, putting many Londoners or those who want to buy in the capital at a disadvantage. 

Figures from the Office of National Statistics show the typical nationwide wage is just under £27,000 per year, yet the average London wage is just over £34,000 per year. That means average nationwide house prices are 6.45 times the typical salary but London house prices are more than nine times the typical wage in the capital, making buying a huge affordability problem. 

Further analysis of the figures shows someone on the average London wage buying a property for the average price in the capital would need to borrow 8.6 times their salary if they put down a 5 per cent deposit (£15,500), or 5.5 per cent times their salary with a 40 per cent deposit (£124,000).

Demand for rented accommodation

It’s hardly surprising to learn then that the capital contributes more than any other region to the Treasury’s coffers via stamp duty. 

LCP says Central London represented 0.8 per cent of all transactions in England and Wales last year. Yet the stamp duty it generated was 14 per cent of the total raised in the rest of the UK, equating to 16 times more per property, with the amount accumulated close to £500m for the Exchequer’s balance sheet. 

Recent analysis Halifax conducted shows that in 2013, 98 per cent of homebuyers in London paid stamp duty, with just one in three purchases in the lower band of £125,000 to £250,000. It says more than 80 per cent of stamp duty revenue is raised in the four regions of southern England – Greater London, the South-east, the South-west and the East of England. Two-fifths is generated in London alone. 

The struggle for first-time buyers to get onto the property ladder in London has led to a surge in demand for rented accommodation, which in turn has also meant the cost of renting in the capital is far higher elsewhere in the UK.

More than half of London’s households are tenants, with an exceptionally large proportion in the private rented sector

The latest index from the website spareroom.co.uk shows the average weekly rent asked for by users who post on its website in London is between £140 and £217 as the index is split between different parts of the capital.

The highest weekly rent asked for in other parts of the country is £188 in Guernsey but even that is an outlier against far lower averages elsewhere. 

“More than half of London’s households are tenants, with an exceptionally large proportion in the private rented sector,” says Brown.

“Reflecting historic surges in demand for tenancies, the average London rent averages more than twice that of areas like the North- east. However, there is evidence that a renewed availability of finance is helping landlords to ease the supply of homes to let. 

“In March 2013, London rents were growing at a rate of just under 8 per cent year-on-year but that rental inflation has now more than halved to just 3.2 per cent as of January this year.”

Looking just at Central London, Heaton says at 38 per cent, the biggest segment of the market is bought for buy-to-let investment, with an estimated 2,300 units per annum going into the private rented sector. 

“This runs at almost 100 per cent occupancy,” she says. “These properties fulfil a socio-economic role and represent a sector that the Government is actively encouraging, stimulating economic growth, tax revenues and retail demand.”

But while London housing is booming, there are disparities within the capital, meaning buyers still need to understand the market as not everywhere will be a goldmine. Many experts insist that local knowledge is key to securing a good deal. 

Mixed picture

That said, the figures show 2013 represented a real boom year for London as many areas witnessed huge price jumps, showing that the capital’s market is not simply dominated by central boroughs. 

Figures from Hamptons show that looking back over the past five years, Westminster and Kensington & Chelsea witnessed the biggest growth in house prices, being the only areas to sustain an 8 per cent or higher rise. In fact, many areas to the east and South-east and extreme west failed to muster more than a 2 per cent jump.

But over 2013, only Harrow and Newham failed to see prices rise by more than 2 per cent. Hackney, Lambeth, Waltham Forest and Wandsworth saw massive 15 per cent rises or more, with Westminster and Kensington & Chelsea having to make do with a lower 10 per cent to 15 per cent rise, albeit more than they had experienced in previous years. 

“The year 2013 saw a step change in the housing markets in London – up to this point, the London story was dominated by Central London, driven forward by foreign investment,” says Morris. But with the recovering economy, government support, increased mortgage availability and the resulting increase in domestic sentiment, there is significant growth and activity in the domestic housing markets in London. Central London almost looks a little deflated in comparison. 

“It’s very much this resurgence in the domestic market that will dictate how the whole London market performs in the future.  But the outlook is certainly looking strong for the London housing market.” 

Comment: Guy Meacock, director of buying agency Prime Purchase

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There is no typical profile of a London buyer. The last time we looked, some 43 different nationalities had enquired about our property finding service, illustrating the wide range of people attracted to the capital. Around 60 to 65 per cent of our business is from overseas buyers, whereas 10 years ago 70 per cent of our clients were British, emphasising the shift over the years.

London housing stock is very different to the rest of the country, with super-prime and prime increasingly prevalent. Super-prime is anything over £10m so properties in Mayfair, Knightsbridge and Belgravia. 

One always used to talk about prime London as a whole, which was focused on areas in and around Kensington and Chelsea, and the better parts of the borough of Westminster such as Mayfair and Belgravia. 

Rampant price inflation has pushed cash out into what can now be classed as outer prime areas, which are less geographically central but achieving prime status all on their own.

There are several reasons why international buyers like London. Europeans like it because it is tax-neutral, they speak English and the timezone makes it easy to work with the continent. 

It is seen as a safe haven for cash for buyers such as Greeks, Russians and the French.

It helps that London is going through a golden period. It is cosmopolitan and open-minded and open for business. It is safe and low-risk, with London property a good bet for your money. 

London property has improved over the past 15 years, as has the city infrastructure.

House prices have raced ahead in London because of supply and demand. This has marginalised the rest of the domestic market but it is not desirable that London gets pushed too far ahead to the detriment of the rest of the country. 

There is a concern among Londoners that if they move out to the country they will never be able to afford to move back. The result is that people hang onto property, reducing turnover, whereas before they may have sold up.

With no cap on the amount of property you can own, there are landlords with scores of flats and houses, yet a growing number of people want to buy. London has very little available land and is low built: it is not a city of apartments, like New York or Paris; instead there are lots of houses.

All this pushes up prices, as do low interest rates. It is cheap to gear up and expand a property portfolio, assuming you have the necessary deposit. 

The yield on rental property is better than the return on savings. Investing in London property is a bit of a no-brainer.

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