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When Will The London Property Bubble Burst?


In August 2008, weeks before the fall of Lehmann Brothers, the average price of a house in central London was £998,217. By August 2014, average prices in the capital had risen 51.5% to £1,512,555. Such a rapid rise in prices, coupled with stagnant UK wages, falling city bonuses and a high cost of living suggest only one thing – London may be experiencing a property bubble.

While not all areas of London are equally affected, it is clear that the extent of the growth in property prices is a London-based phenomenon. East London has seen property prices rise 38.16% to an average of £384,511. North London has seen prices rises of 41.74%, and West London has seen growth of 52.39% (Rightmove.co.uk) since 2008. In contrast, property in wealthy areas such as Hampshire has grown by 9.95% and in Buckinghamshire by 28.41% over the same period.

Earlier in 2014 huge demand was reported across the capital as a growing market stimulated sales. In addition, the availability of the Government’s Help to Buy scheme helped many first time buyers get onto the property ladder. Coupled with this, foreign investors with deep pockets snapped up 90% of new-build property. Between January and June 2014 prices rose by 23.42% in central London, compared to the national average of 11.7%.

Despite rapid growth in the spring, signs of a slowdown in the market have been detected over the summer months. In May 2014 the average price of a house in central London was £1,784,786. Between May and August prices fell by 15.25%. Price reductions were also seen in North London (5.75%), North West London (3.11%), South West London (6.66%), and West London (3.61%). By the end of the year prices in Greater London had risen 11% on 2013 prices, with a 3.3% fall from the previous month.

Coincidentally perhaps, May 2014 was also the month when the new tougher rules for mortgage applications (MMR) came into force in England. These rules put stricter limits on the mortgages available to borrowers and now take account of spending habits as well as personal income. In many cases homebuyers have been offered a lower mortgage in principle than they had expected, reducing the cost of the property they could buy.

At the same time, many London residents decided to take advantage of a bullish market to sell their property. Coupled with the MMR’s effect on demand, the London market soon had more sellers than buyers in the second half of the year. Asking prices were revised downwards, and some experts began to predict that London’s housing bubble was beginning to burst.

In the future, other factors may come into play to make the situation worse. The Bank of England has been threatening for some time to raise interest rates. If it did so in 2015 many more first time buyers might find themselves unable to get a mortgage. This is because current wage increases are on average 3%, while the cost of living is rising at a rate of about 2.7%. Now that the MMR takes into account a borrower’s outgoings as well as their income, banks may decide that fewer people pass their lending ‘stress tests.’

At the same time some banks have decided to protect themselves from risky lending by effectively opting out of the lower end of the London market. A case in point is Lloyds, which has recently cut the maximum equity mortgage it is willing to offer through the Government’s Help to Buy scheme to £150,000. Until recently Lloyds had a 50% share of the Help to Buy equity mortgage market. The move means that London buyers will no longer be able to access this Lloyds mortgage because few properties sell below the threshold. The decision will put an additional squeeze on lending in the capital.


If we take all of this evidence into account, it is likely that the London property market has slowed and prices are less volatile. The extent of price reductions may depend on the behaviour of foreign property investors, who have been heavily influenced London’s market in recent years. Somewhere between 50% and 85% of all prime London sales are to foreign investors, and a higher percentage buy the city’s prestigious new build property off-plan. This is reflected in the fact that prices still rose over the summer in East London (1.9%) where many of these new developments are underway.

For many foreign investors London property is considered a safe haven. In fact, more than 114,000 millionaires moved to London in the decade to 2013. However, there is increased competition from a number of international locations such as New York, Hong Kong and Singapore. With the Chinese economy slowing down and the US economy posting lower than expect

ed figures, a robust foreign market for London property is not guaranteed. Many Arab investors are making the decision to invest in Istanbul rather than London, while some Chinese investors are flocking to value-for-money deals in Thailand.

From a property-owner’s perspective, the biggest future threats to the London property market are falling levels of foreign investment, coupled with a huge house-building program aimed at Londoners who are currently priced out of the market. In the decade between 2001 and 2011 the numbers of people renting in the UK has jumped from 1.6 million to 8.3 million (ONS). Many of

these people cannot currently own their own home because demand is greater than supply. If the UK government and the construction industry instigated a period of extensive house building, property prices across the country would inevitably fall because supply and demand were more equally matched. London prices could well be hit hard.

There is no doubt that the London property market has experienced a slowdown in recent months. However, it is too soon to be sure whether recent price drops reflect the bursting of a property bubble. In the meantime it is important for potential buyers to exercise caution, and for sellers to aim to sell their property as soon as they can. Circumstances may change again, but is likely that prices will continue to adjust over the coming year as demand for UK mortgages falls and the Bank of England starts to put up interest rates.

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