It’s not just the weather that has turned cold, as house prices in the capital catch a winter chill. Marc Da Silva takes a close look at London’s property market.
On the face of it, the UK economy is on the road to recovery, with unemployment dropping and wages increasing. Record-low mortgage borrowing rates and housing initiatives such as the Help to Buy scheme have also contributed to a buoyant property market and nowhere has been more buoyant than London.
Sealed bids, surging prices, there may have been a sharp rise in London property prices over the past 12 months, but there is now growing evidence that the significant price growth witnessed last year in London, especially during the early part of 2014, is starting to grind to a halt as the capital loses its ‘boom-town crown’ to the South East of England.
“Price rises will be less pronounced in London than they were in 2014,” says Doug Shephard, Director, Home.co.uk. “Prices will rise more quickly in the south, although the northern markets will continue to improve.”
The latest figures from the Office for National Statistics (ONS) reveal that home prices rose by 10.4% to an average of £271,000 in the year to the end of October, down from annual growth of 12.1% in September, suggesting that house price growth in the UK is indeed tailing off, especially in the capital.
London yet again showed the strongest growth in prices, although the market in the capital is cooling, with annual growth falling in October to 17.2% from 18.8% in September.
Based on sold properties, the Land Registry, Halifax and Nationwide, also report a similar trend of slowing growth toward the end of 2014.
Nevertheless, prices in the capital are still around 35% above their 2007 peak – an unsustainably high figure, according to London-based estate agent Adam Feather of Robert Anthony, who agrees that property price rises are slowing and converging with earnings growth.
That would mean quite a slowdown. Wages are not posting double-digit annual rises, and are unlikely to, so could home prices in the capital really stagnate or indeed fall this year?
Downward trajectory
Forecasts from the Centre for Economics and Business Research (CEBR) point to a 0.6% drop in average UK house prices in 2015. This is in sharp contrast to 7-8% growth over 2014.
The CEBR said that London would lead the decline this year, with the average price of a home in the capital expected to depreciate by 3.3% in 2015 – more than any other part of the country. In fact, for the first time in five years, home price growth in the UK is set to be higher when London is excluded.
“The boiler room of the residential property market [London] is no longer roaring,” says Shona Ford of Smiths Gore.
Graham Davidson of Sequre Property Investment is not surprised annual price growth slowing. “It was likely that prices in many places in the UK would have to start to slacken at some point,” he says. “London in particular was bound to experience a slump, as the rate of increase simply could not continue.”
Weaker demand
Major indicators such as fewer new buyer enquiries and properties taking longer to sell also point to falling prices. The number of potential new house-buyers dipped for the sixth consecutive month in December, while price growth fell to its slowest pace since May 2013, according to the latest RICS Residential Market Survey.
Across the UK, 10% more surveyors saw the number of potential new buyers decrease in December 2014 and London saw the weakest demand with 45% more surveyors reporting a decline in enquiries – the eighth consecutive monthly fall.
“The flatter trend in the market is partly a reflection of potential buyers becoming a little more cautious about making a purchase,” says Simon Rubinsohn, RICS chief economist.
Uncertainty
There are a number of factors contributing to a housing market that is rife with uncertainty. Talk of an increase in interest rates, more stringent mortgage lending conditions, caused partly by the implantation of the Mortgage Market Review last year, the introduction of capital gains tax for overseas buyers which may be deterring some prospective international purchasers, and a looming general election, with housing set to be high on the political agenda.
Nina Skero, CEBR economist, comments: “The uncertainty surrounding May’s election, proposed changes to property taxation and reduced foreign demand are already bringing down house prices.”
Signs of buyer uncertainty are already starting to creep into the market, as reflected by the latest data from the British Bankers’ Association which shows a significant drop in the number of mortgage approvals.
Tony Jamieson at Clarke Gammon Wellers says: “The market is definitely a bit cooler now than earlier last year, it is moving from a sellers’ to a buyers’ market.”
Window of opportunity
The fact that annual property prices are rising at a lower rate may concern some people, but it shouldn’t. A few months ago prices were soaring at an unsustainable rate, leaving the government and the Bank of England with no alternative but to take the heat of the market by introducing various measures, such as stricter lending conditions, to intentionally slow demand for property, and in turn home prices, helping to keeping interest rates at a record low and boost affordability.
While we may see a rather muted housing market in the first half of 2015, which may present prospect buyers with greater room for negotiations – a genuine ‘window of opportunity’ to strike a good value for money deal - on certain properties in some areas, especially in the run-up to the election, it may also deter would-be vendors from listing their property for sale – restricting housing stock in the process.
Critically, the level of housing stock on the market continues to hover close to historic lows with new instructions to agents falling in 10 of the last 12 months, RICS said. Consequently, there is a risk that with so little housing available any rise in demand could quickly lead to higher prices rather higher sales.
A lack of housing stock has been one of the main drivers fuelling price growth in London in recent years and although developers are working hard to boost new housing supply, there are still nowhere near enough homes being built to meet high demand from purchasers.
Room for growth
Despite various downward pressures, the housing market is likely to be helped by an ongoing economic recovery, falling unemployment and record low mortgage rates, not to mention a chronic housing shortage.
A striking statistic from Genworth, an insurance firm, is that there are six babies born annually per new home developed. And that has been the case for five years.
It highlights the supply-demand imbalance in the country that has played a big part in fuelling higher prices, and it seems that history may repeat itself again once the uncertainty of the general election is our of the way.
“With lack of supply and the lowest interest rates for 200 years, the market can only go one way and that is up,” Kevin Peel at Aston Mead remarks.
We may not witness a repeat of the surge in home prices that we saw in the early part of 2014, but improved economic foundations mean that the market is more stable and over the medium to long-term, prices should rise further, albeit at a more moderate rate.
Beyond 2015
With the UK economy set to continue on the path to recovery, there does appear to be scope for further property price growth.
The average price of a home in London is set to rise by 33% by 2019, outstripping the average of 30% in England and Wales, according to an estimate made by the Oxford Economics’ forecasting models.
Liam Bailey of Knight Frank concludes: “With the UK economic recovery continuing to gain traction and with positive real wage growth increasingly likely over the next five years, we believe there is scope for sustained price growth beyond 2015.”