In the last six months members of the Royal Institution of Chartered Surveyors (RICS) have reported falling prices in many areas of London. On the other hand, Land Registry figures show the average price for a home in February 2015 increased by 13.1% from the previous year. Does the recent slowdown in the market suggest a downward trend in London’s property market, or is there room for optimism in the year ahead?
Figures from the Land Registry show that after a promising start to 2014 the property market across London fell in the autumn, with average house prices dropping from £463,180 in August to £456,211 in October. However, prices have grown slowly since then, with February’s average climbing above its August 2014 peak. Despite this correction, property cross London has seen double-digit annual growth since November 2013.
However, current figures may reflect a market slowdown as a result of the approaching general election, with many buyers and sellers waiting to see who forms the next government before making a move. RICS has reported a decline in the number of houses coming to the market, something that reflects potential uncertainty but also keeps prices high. RICS predicts that price falls in London are temporary and that prices will increase by 30% over the next 5 years.
Not all London boroughs have been affected in the same way by the price slowdown. Prime London locations, such as Kensington and Chelsea, have seen more volatile conditions, with a price drop in 4 of the last 6 months. In February 2015, asking prices were £1,310,083 (up 7.8% on the previous year, but down almost £30,000 on June 2014). Newham in the east of the city saw much stronger growth, with only a slight fall in prices (-0.4%) in February to reach £292,306, a 21.4% increase from 2014.
Property consultants Knight Frank predict that in the next few years the best deals will move from Prime London locations to growth districts further afield. Areas in Zones 2, 3 and 4 with high demographic growth, planned regeneration projects and access to Crossrail may well become property hotspots by 2018. Tottenham Hale, in the borough of Haringey, is one of the predicted hotspots, with prices predicted to rise 67% in the next 3 years.
Other areas have shown encouraging growth in recent months, including the boroughs of Lambeth (£531,299, up 18.7% from 2014), Southwark (£551,962, up 17.2% from 2014), Tower Hamlets (£481,745, up 16.0% from 2014) and Wandsworth (£575,704, up 13.8% from 2014).
In general it would seem that while the rate of price increases London prices is slowing, the market is enjoying solid growth.
May’s general election may change the picture, but not perhaps in the way most people think. There has been a great deal of coverage of a future Mansion Tax on homes valued at over £2 million, with fears expressed that the tax could affect the Prime London market and deter foreign investors.
As The Economist magazine points out, the tax will indeed affect homeowners in London, with 81% of all those liable to pay living in the capital. This is to be expected because income tax revenues are highest in London and the high property prices in the capital reflect the desirability and scarcity of the city’s housing.
With the average price of a house in the capital standing at £463,872, and the average price of a home in Kensington and Chelsea standing at £1,310,083, only a minority of homeowners in London will be liable for the tax. Those ‘accidental millionaires’ who are property rich but income poor will be spared the tax until they sell their home.
Policies that are more likely to influence London’s property prices in the coming months include any reforms to the ‘Help to Buy’ scheme introduced in 2013. The £600,000 ceiling offered to first time buyers with a 5% deposit has undoubtedly helped to fuel price rises in the capital.
The Shadow Chancellor Ed Balls has criticised this scheme and may repeal it (“the taxpayer should not be guaranteeing mortgages on homes worth as much as £600,000”, Evening Standard).
While Chancellor George Osborne has extended mortgage guarantees for new build homes until 2020, he has not given the same guarantee for existing homes that currently benefit from ‘Help to Buy’ guarantees. He may also repeal or abolish this scheme in the next parliament.
It is unclear the effect that removing this part of the ‘Help to Buy’ scheme might have on London house prices, but it is possible that many would-be buyers could be locked out of buying a home in the capital.
Labour’s proposal to abolish Stamp Duty for first time buyers would certainly make a big difference to Londoners, and so may help to mitigate any fall in purchases at the lower end of the market if some parts of ‘Help to Buy’ are amended or abolished.
In recent years property price rises have been driven by large gains in the Prime property sector. If there is a period of instability after the election, such as a minority government, this could affect how foreign investors perceive the UK’s stability.
If an EU referendum is agreed, any period of uncertainty prior to the vote could deter some foreign investors. As an international city, London’s property market is more vulnerable to skittishness from these investors and Prime property values could fall.
Despite political uncertainty, there are several reasons to retain confidence in London property. Housing is likely to remain in high demand for many years, simply because demand far outstrips supply. London’s high concentration of jobs and creative talent means that this is unlikely to change.
The overall trend for UK house prices is upward, and even large-scale building programs will not reduce the attraction of living in one of the world’s most dynamic global cities. Chosen carefully, London property is likely to remain a good investment for years to come.