While the figures don’t indicate falling prices, they do show that (for the second month in a row) property values in the capital rose more slowly than the UK average of 5.7%. This suggests that the period of bullish growth in 2013-14 is over.
However, the situation is not quite as simple as a correction to an overheated market. In fact, while many established areas of central London have witnessed a sudden fall in demand, many areas beyond Zone 1 are seeing demand surge, as Londoners move out to the suburbs, the south coast and the Home Counties in search of better value for money.
With the average price of a London home now topping £500,000 and interest rates set to rise at the beginning of 2016, we should ask the question – is market confidence too high in London? Should buyers be more cautious when deciding to invest in the capital?
A Cautionary Tale
One of the most obvious signs of decline in London property is the rapid slowdown in house prices in the luxury markets of Kensington and Chelsea, Mayfair and Belgravia, Notting Hill, Chiswick and St John’s Wood. All of these areas have experienced a dramatic fall in demand since May.
According to the Land Registry, the average price of a detached house in Kensington and Chelsea was £5,148,187 in May 2015. While this is up 5.6% on the previous year, the overall figures show a significant drop in house prices from the double-digit growth of May 2014 (16.6%), reflecting a rapid drop in demand.
A similar trend can be seen in Hammersmith and Fulham, where the average price of a detached house was up 5.5% in the previous year. Here price growth has seen a sharp decline since May 2014, when annual growth was 19.4%.
Stamp Duty Impacts Sales
The main reason for this sudden drop in demand is the new rules on Stamp Duty, which came into force in November 2014. The changes have hit the luxury market hardest, with significant tax increases for homes worth more than £1.5 million.
The impact of Stamp Duty can be seen if we consider the tax payable on a 3-bedroom house in Chelsea, currently on the market at £1,895,000. Before the stamp duty rules were changed, buyers would pay £94,750 in duty. Today, the duty payable is £138,650, a 46.3% increase.
Some Areas of Prime London are Still Booming
While the traditionally affluent areas of central and west London are witnessing a decline in price growth, the Prime property market in east and south London continues to boom.
Attracting a significant proportion of foreign investors, developments such as Maine Tower and 10 Park Drive are seeing off-plan apartments sell within 24 hours.
Maine Tower in Canary Wharf will open in 2019, the first residential skyscraper in that part of London. Flats in the Tower, which sold out in less than four hours, start at £350,000 for a studio apartment.
10 Park Drive will also open in 2019; with studio apartments (also sold out) starting at £395,000. These Prime London developments are in high demand from foreign investors and have seen rapid price rises.
On the South Bank of the Thames, the Nine Elms development will offer 18,000 new homes as part of a 195-hectare business quarter. Studio apartments at St George’s Wharf, which opened in 2014, are currently available on the market for upwards of £970,000.
Demand Increases in Zone 2
While affordability concerns have begun to affect the residential housing market in London, savvy buyers looking to get more for their money have abandoned Zone 1 for more spacious properties in Zone 2. Popular new hotspots include: New Cross, Kennington, Hackney Wick, Whitechapel, Stepney Green and Mile End.
The demand for more affordable housing can be seen in the rising prices of boroughs beyond the centre. In the borough of Haringey, average prices were £503,468 in May, up 10.3% on the previous year. In Barking and Dagenham, average prices were £277,044, up 13.6%. In leafier Ealing to the north west, the average price of a property was £459,081, up 12.4% since 2014.
With the Bank of England warning that interest rates are likely to rise in the first few months of 2016, those who struggle with affordability will have to move further out of the city to find a home.
The Effect of Crossrail
Another driver of price rises to the east and western edges of London will be the opening of Crossrail, which will drastically reduce commuting times when it opens in 2018.
The line will connect locations east and west (Reading, Maidenhead and Slough, Ilford, Romford and Shenfield, Abbey Wood and Gravesend) directly to central London and Canary Wharf, making it possible for local residents to benefit from quick and convenient journey times to the capital, and giving them greater access to the UK’s largest job market.
The London property market benefits from the huge concentration of people, jobs, entertainment and culture available in this global capital. While there has been a correction in the luxury property sector, there is no indication of a slowdown in foreign investment, or in prime London developments.
Living in the UK capital will continue to appeal to a wide range of people, and as the population increases demand will continue to rise. While property prices in the most established central locations may see slower price rises than in recent years, other areas in outer zones are likely to benefit from rising demand and better transport links.
At the same time, improvements in transport infrastructure, such as Crossrail and Thameslink, will enable families to live further outside the capital while younger workers continue to enjoy the vibrant culture of the city.
If you are considering buying a property, think carefully about its location. Consider future planning for transport and housing developments, as these are likely to impact the value of your home. With careful research, it is likely that you will benefit from market growth as demand continues to exceed housing supply.