Is London house price growth set to bounce?

Reasons savvy investors are looking at London property again

According to Hometrack, London’s house prices declined by 0.3% in the year to August 2018. While Brexit has been trumpeted as the main driver of slowing house price growth in the capital, the small reverse in average house price is in stark contrast to pre-EU Referendum predictions of a hit of 30% or more.

In this article, we examine why property prices in London (where they have been hit hardest) could take experts and investors by surprise post-Brexit.

Why are property prices in London so sluggish?

If you take notice of the noise from the news, you’ll be convinced that Brexit is the sole cause of the crack in London house prices. However, the vote to leave the EU was probably an excuse for investors to pull back from a market that was beginning to look overheated.

House price growth in London had already begun to show signs of slowing by the time of the Referendum. Affordability had become stretched, lending criteria had been tightened, and increases in stamp duty were taking their toll. Add to this the changes in property taxation for investors, and the property investment landscape had suddenly turned very gloomy. Even without Brexit, the minor falls in London’s average property price in recent months has proved how resilient the London property market is in the face of such financial headwinds.

Reasons to be optimistic

We’re now seeing reasons to be optimistic. Though the government has announced a proposal to impose an extra stamp duty of 1% to 3% on overseas investors, it has otherwise halted its attack on the buy-to-let sector. Meanwhile, investors have taken action to mitigate regulation and tax changes. Investment in bricks and mortar is still a solid decision in a strong and stable economy.

Affordability issues in London have started to recede, too. According to the Office of National Statistics (ONS), the average salary in London had increased to £37,759 in 2008. The Global Financial Crisis hit wages in the capital, with the average salary falling through to £36,256 in 2015.

By 2016, with the average house price at £476,800, the multiple of salary to house price had increased to 13 from 10 in 2011 and 9 in 2009. Though the average house price has increased to £485,300 in London, the average salary in 2017 rose to £39,476. Consequently, the multiple of average house price to affordability has begun to fall and now stands at 12.3.

A couple both earning the average wage could pay the average price on a multiple of six times joint earnings. Effectively, London house prices are now 8% more affordable now than two years ago. With wages forecast to grow by 3% over the next year, and London prices forecast to remain static, affordability is likely to increases further, with the house price to wage ratio falling to below 12 for the first time since 2014, a year in which London house prices increase by more than 14%.

Where to now for London house prices?

While we’re not out of the woods yet, there are signs that the market could turn north in the coming years. Some London boroughs are experiencing house price growth to rival other cities in the UK. The best-performing boroughs have been outside of prime central London, with districts such as Greenwich, Bromley, Merton, Redbridge and Tower Hamlets all experiencing average house price rises of 5% to above 10% in 2017 (ONS).

In other words, average house prices in London have been largely dragged lower by the poor performance of prime central London property – the top 5% of homes by price and quality. While reticence of buyers to commit to buying at the luxury end may persist until Brexit negotiations are complete, once certainty returns to the market then we would expect prices to pick up as confidence returns.

Savills expects likewise and is predicting that prime central London house prices will increase by 12.4% between 2019 and 2023. Savills also expects prime property prices in the commutable boroughs of London to increase during this period, with prices rising by 9.3% in districts within a half-hour commute of the City.

With stamp duty eliminated on the first £300,000 for first-time buyers, we expect more sales activity at the lower end and increased confidence at the higher end to support house prices in the five years after Brexit. And, as we have seen before when London house prices start rising, it’s like they are filled with helium.

London is still a global city. It will still be a global city after Brexit. When house prices in London start to rise, the lift could be significant. Savvy property investors will be positioning their portfolio to take advantage of this potential, by buying in the best locations in the capital. To find out where our research tells us these are, get in touch with Gladfish today on +44 207 923 6100.

Live with passion

Brett Alegre-Wood

Brett Alegre-Wood
December 5, 2018

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