Residential Property Forecasts

Residential Property Forecasts
 
Has London’s market run out of steam?

2 November 2017, by Savills Research

A decade of strong growth in the capital’s housing market has seen it become dislocated from the rest of the UK – and left the market pushing against the limits of mortgage regulation and affordability

 

“Capacity for further house price growth in London is limited, with mortgage regulation doing exactly what it was intended to do”

Katy Warrick, Savills Research

Price growth slows

With a home purchase representing such a major financial commitment in London, buyer sentiment has become very sensitive to the current political and economic uncertainty. Over the course of 12 months, the slowdown in annual rates of price growth has been dramatic; from 7.1% to -0.6% according to Nationwide. Despite a continuing low interest rate environment, further modest sentiment-driven price falls over the next 12 months are a distinct possibility.

Hitting mortgage limits

Perhaps more importantly, buyers have become increasingly confined to more affluent households, who have stretched themselves to the limits of how much they borrow relative to their income. Numbers of housing transactions in London have fallen as a consequence, most significantly among those taking on a larger mortgage to trade up the housing ladder. There were 29,000 in the 12 months to the end of June this year, just 36% of the levels of 10 years ago. Stamp duty has also become a bigger cost, eating into a buyer’s equity.

The area that is within the reach of both aspiring first-time buyers and the mythical ‘ordinary middle-class, 2.4 children’ household has also shrunk. Buyers have progressively had to widen their search across the 33 boroughs over the past 10 years, initially pushing up house prices in the wealth corridors, then at their fringes, then into new hotspots to the east and more recently the extremes of outer London. In most cases, the up and coming areas have now up and come.

Of the 600 wards or neighbourhoods of London for which we have reliable house-price data, only 28 now have an average house price of less than £300,000. An MP on a salary of £75,000 would only be able to buy the average-priced property in 34% of London if they had a 20% deposit and borrowing 4.5 times their income.

Future outlook

The capacity for further house price growth in London is limited, with mortgage regulation doing exactly what it was intended to do. It is holding back borrowers from taking on excessive levels of debt in an attempt to chase the market. This has slowed the market to prevent it from overheating. Mortgage regulation is likely to continue to act as a drag on the capital’s house price growth over the next five years, especially as interest rates creep up and the mandatory stress testing of affordability becomes more of a constraint.

That could change if interest rates rise more than is currently anticipated. But it is more likely that modest price growth will be reliant on London-wide household earnings growth, the ability to attract international wealth in the most valuable markets, and infrastructure and regeneration unlocking the latent capacity for growth at a local level.

Increasingly, the gains made in London’s housing market are being exported into the commuter zone where buyers can get more space for their money.

 

 
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