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London has experienced a heavily disrupted 10-year property cycle, but healthy economic growth along with an insulated lettings sector suggest the market may not depress for much longer.
What is happening to London’s sales and lettings market, and perhaps more importantly, what are the underlying causes? Is this shift in the market related solely to uncertainty surrounding Brexit, or are there other factors to consider?
London property prices are falling
Prices in the capital capped out in July 2017 and have been declining slowly ever since. London property prices decreased for the sixth month in a row in January, taking more than £15,600 off the value of the average home since the market peaked 18 months ago. The luxury inner core of the capital has been hit hardest, with drops of 25% in certain areas.
Brexit appears to be the primary driver of the sales slump, at least for the time being, but with the end in sight, a positive outcome could lead to a reversal of this downturn.
Vendors are holding back, hoping to achieve a higher price later in the year after political uncertainty has subsided: Rightmove’s January house price index reports that 19% fewer properties came to market last month compared to the same period a year ago, with inner-London homeowners most hesitant to come to market, alongside a 24% drop in new listings. Despite this, the same report highlights a 5% increase in home-hunting, showing prospective buyer interest.
The market for first-time buyers is nonetheless relatively healthy, and the reduced starting prices should stimulate growth in this segment. On the other side of the coin, aware of the growing unease, London buyers are also holding out for big price reductions: homes are taking almost twice as long to sell as they did four years ago, and there were fewer sales in 28 of the capital’s 33 boroughs last year. Sellers are responding accordingly, and asking prices have dropped below £600,000 for the first time since 2015 – this could be an advantage for London buyer with an eye out for lower prices.
Of course, Brexit is not the only factor at work here: lack of affordability, sharp increases in stamp duty and land tax, the possibility of a fresh general election, as well as Brexit-related job uncertainty all play a part.
There are also plenty of countervailing forces trying to push prices in the other direction. Foreign investment has propped up the London market, with international buyers capitalising on cheap sterling to secure a ‘Brexit discount’. The forces of supply and demand have undoubtedly had an impact too; the current London slump would have been much more dramatic had it not been for the capital’s severe housing shortage.
London rents are slowly increasingly
London lettings are also affected, steered by similar factors.
While landlords may have wanted to offset the government’s tax regime by raising rents, uncertainty surrounding Brexit seems to have forced the vast majority to forfeit this to maintain a steady income. Lower demand from EU migrants may have also steadied rents: research conducted by agents Hurford Salvi Carr revealed that EU nationals made up 40% of renters in the capital in 2018.
However, like the sales market, the limited supply has insulated the lettings market from more severe changes. Compared with January last year, existing rental stock in London is down 22%.
This lack of supply has meant that, despite the political climate, rents are actually still increasing – to almost 5% in the 12 months to December 2018, according to lettings indexes. Growth in the capital may be slow (increases are almost 3% lower than projected before Brexit) but with demand still outweighing supply, the London lettings market should continue to grow.
Looking ahead, the Tenant Fees Ban coming into effect on 1 June may push up rental prices further, as would a conclusion to Brexit. Rent controls, as suggested by Mayor Sadiq Khan, could have the opposite effect.
Millennials are leaving London behind
In recent years, increasing numbers of first-time buyers are relocating outside of London in a bid to find better value.
Millennials are now leaving London at the highest rate in more than a decade, with £30 billion worth of property bought by Londoners outside of the capital – the highest level since 2017.
The millennial exodus has ultimately fuelled some strong growth across the UK. High numbers of those relocating outside of the capital has ensured that activity in the property market has been de-centralised and dispersed across the UK, livening the market nationwide.
Millennials relocating outside of London have fuelled rental growth in Manchester, Leeds and Birmingham, with house prices in Birmingham rising twice as fast as the national average.
The state of London’s property market
London sales and lettings sectors are experiencing reduced activity, fuelled primarily by pre-Brexit uncertainty. Nevertheless, buoyed by healthy economic growth and the continued scarcity of new homes in the capital, the market is unlikely to depress much further. Indeed, spurred by younger buyers and renters, the market outside of London is already showing strength.
Longer term, the state of London house building, the legacy of the global financial crisis, interest rate rises, and changes to property taxes will all mould the future of London’s market – not just Brexit.