Room for growth


London’s housing market may have caught a chill over the past 12 months, but what next for house prices?

Looking to the past can help you understand the future. With that in mind here’s a brief run down of some of the recent stories in the London property market. Draw your own conclusions...

1 2012 - 2014
In mid-2014 home prices jumped at an annual rate of 20.1%, having been rising steadily since 2012. There was widespread concern that the property market was in ‘bubble territory’, with Mark Carney, the Bank of England (BoE) Governor, at the time describing the market in London as the greatest risk to Britain’s economic recovery.

BoE took the steam out of the market by introducing new tougher affordability tests, as part of the Mortgage Market Review (MMR), requiring lenders to check more thoroughly whether borrowers can afford to take out a home loan. This contributed to an overall slowdown in mortgage lending, preventing many would-be buyers from acquiring property.

2 NOV 2014
By November 2014, the party was over and the market had all but ground to a halt. The number of mortgages approved for house purchases had fallen to a 17-month low of 59,029, down 22.4% on the 76,574 offered in January 2014, reflecting the wider slowdown last autumn.

3 DEC 2014
With the market ending 2014 on the back foot, the proportion of discounted London homes hit 29% in December 2014, up from only 15% at the start of the year, research by property website Zoopla revealed, as the property market swung back in favour of buyers, spurred partly by new stamp duty reform.

With momentum behind the property boom fading and housing market activity clearly off its early-2014 highs, London, the boiler room of the UK housing market, was no longer roaring, causing price growth to ease, amid a market correction, with many housing experts agreed that UK prices would rise at a ‘more moderate’ rate in 2015, and possibly even drop in the capital.
Home values in prime central London’s luxury market have been particularly hard hit by extra stamp duty bills following the changes to the levy announced by George Osborne last December. The buyer of a £2 million London home, for example, now has to find £153,750 to cover the stamp duty, up from £100,000 before the overhaul last December.

Some sellers have been forced to slash their asking price in an effort to stimulate greater interest in some areas where gazumping and sealed bids were standard twelve months ago. A one-bedroom apartment in close proximity to Kings Road in Chelsea, west London, on the market at £820,000 in February last year is now being advertised at £650,000. Elsewhere, a three-bedroom mews house on the borders of Knightsbridge is now available at an asking price of £3.15 million, having been initially listed for sale in April 2014 for £3.65 million.

“Annual house price growth is now running at less than half the pace of mid-2014,” said Robert Gardner, Nationwide’s chief economist. “Over the longer term we would expect house price growth to converge with earnings growth, which has typically been around 4% per annum.” He did however add that a lot would depend on “supply side developments”, with the level of available housing failing to keep pace with demand in recent years.

4 FEB 2015
By February 2015, data from the Office for National Statistics (ONS) revealed that London house prices were falling faster than at any time since the slump triggered by the collapse of Lehman Brothers in 2008, with the average cost of a home in the capital having slipped £9,000 to £490,000, the lowest level in almost two years. It was the sixth monthly fall since prices peaked in August 2014, fuelled by tougher mortgage requirements now firmly in place, a stronger pound versus the Euro, which had made London more expensive for European buyers, and growing uncertainty ahead of the general election with some would-be buyers deterred by the threat of Labour’s proposed mansion tax on £2 million plus homes.

The fall in unsustainably high house prices in the capital was broadly viewed as positive, as it took the heat out of what was seen as an over-cooked market. “Although it might not seem like it, this was actually good news for the housing market, as price rises that are too sharp can prevent people from getting on the property ladder,” said Stephen Smith of Legal & General.

5 JAN - MAY 2015
The first half of 2015 has certainly favoured the opportunist buyer across much of the capital, illustrated by the fact that London is no longer home to the fastest growing house prices in the UK. Prices in Northern Ireland, for instance, have recorded an upswing of 10.5% to £152,000 over the last year – more than twice the pace of growth in London, where the typical home is now worth £503,000, the latest ONS data shows.

Although prices in the capital are still rising on an annual basis, they are doing so at a much slower rate, and if this pattern of monthly decline continues then London could be in negative year-on-year territory within months.

6 MAY 2015
Hopes for a post-election surge in the supply of houses to the market have failed to materialise, and some experts believe that the widening supply-demand imbalance will push prices up once more, supported by a renewed sense of optimism in the market, with more buyers taking advantage of the low interest rate environment while it lasts.

“There are signs that housing market activity is now on the up, while a shortage of properties coming on to the market is having an upward impact on prices,” said Howard Archer, chief economist at IHS Global Insight. Archer now expects house prices to rise by 6% in 2015 and a further 6% next year. RICS agree that tight supply conditions continue to be a key factor underpinning prices, with fresh instructions to sell becoming increasingly sparse while the average stocks per surveyor has fallen to a new record low of 52 properties, it said.

“It is hardly surprising that prices across much of the country are continuing to be squeezed higher with property set to become ever more unaffordable,” said RICS chief economist Simon Rubinsohn.

7 SEPT 2015
Even if prices do dip further in the short-term, the signs point to overall growth longer-term, with RICS now forecasting that values will increase by 25% over the next five years and become “ever more unaffordable”, on the back of the widening supply-demand imbalance. This may explain why accountancy firm PWC forecasts that home ownership will continue falling to dramatic new levels of under 60% by 2025, as the rise of ‘Generation Rent’ looms.

“...the shortage of properties coming on to the market is having an upward impact on prices,”