A League of its Own

The average price of a UK home now stands at £262,000, as measured by the ONS’ index, but the boom in London considerably distorts the national picture. In May 2014, a home typically cost £492,000 in London - almost double the national average and a jump of £7,000 from £485,000 in April

Soaring house values in the capital has added to growing concerns among some commentators that London’s property market is in ‘bubble territory’ posing a risk to Britain’s economic recovery.

Brakes applied on house price growth
Determined to slow sky-rocketing values, the governor of the Bank of England (BoE), Mark Carney, has introduced tougher mortgage checks, as part of the Mortgage Market Review (MMR), placing greater demands on banks to ensure customers can repay loans. The move has had an impact since being implemented in April, with longer processing times for mortgage applications clogging up the mortgage market, delaying transactions and hence slowing the market marginally. Mounting speculation that the BoE will soon increase interest rates, currently at a record low of 0.5%, is also weighing on sentiment causing overall demand from purchasers to fall. “It could happen sooner than markets currently expect,” Carney recently said.

Talk of an interest rate rise, a possible housing bubble and the introduction of MMR have dampened the property market, with UK house prices growing at the slowest pace in 18 months in July, a survey shows.

Price increases but at a slower pace
Research by property analyst Hometrack revealed that monthly growth in national property prices in July was the slowest since February 2013, with prices rising by just 0.1%, down from 0.3% in June and 0.5% in May.

The property market traditionally experiences a seasonal tapering off over the summer months when levels of buyer activity tend to become more subdued, but this data suggests that ‘bigger forces’ are at work, according to Richard Donnell of Hometrack who recently said. “It is clear that there are bigger forces at work with a pronounced loss of momentum in the London housing market in the last three months.”

The housing survey has also showed that the proportion of new buyers registering with agents fell marginally in July, forcing sellers to re-consider their asking prices. The latest house price index from property website Rightmove reveals that asking prices fell by an average of £2,116 in July. But worries about a painful property price correction are probably overwrought, according to Deutsche Bank’s chief UK economist George Buckley, who does not believe that London’s housing market is in a bubble.

London remains robust
London’s property market may have slowed of late after completely parting course from the rest of the UK, but Buckley argues that there are reasons to believe that the capital will prove resilient. UK housing supply remains constrained, with the number of housing completions in 2010-13 the lowest since just after World War II, with London particularly weak, while there are growing indicators to suggest that demand from buyers may pick up in the coming weeks, supported partly by Help to Buy.

The government-backed scheme, which enables people who qualify to buy property with a low deposit, has boosted activity in the housing market, with activity among first-time buyers at a seven-year high, according to Halifax. Help to Buy has not only encouraged first-time buyers, but has also freed up the market for richer buyers who could afford larger properties, according to Rightmove Director Miles Shipside.

He commented: “The unleashing of this more affluent group, plus good supporting acts from first-time and second-time buyers, will mean that the musical chairs of trading up and down will continue in the second half of the year having been kick-started by Help to Buy in the first half.”

“It is clear that there are bigger forces at work with a pronounced loss of momentum in the London housing market in the last three months.”

Shipside’s view is supported by the fact that despite the slight cooling in the market of late, conditions remain stable, with plenty of mortgages still available at attractive borrowing rates while there are still lots of people looking to buy property, especially as we enter into the busier Autumn period for the housing market.

Autumn is typically one of the busiest times of the year as far as buyer activity is concerned, making it a potentially good time to sell property, as it is when vendors can typically expect to achieve the best price, in the shortest time.

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Astronomical! The latest round of price increases have been boosted by the availability of affordable mortgages and government incentives such as the Help to Buy scheme.

Positive signs
There are already signals to suggest that demand from buyers is already rising, reflected by a recent upturn in mortgage lending.

Having adjusted to lengthier advisory sessions and longer processing times caused by MMR, banks loaned £11.2 billion in gross mortgages in the year to June, up 24% year-on-year, and up £1.3 billion on the total for May 2014, according to the British Bankers’ Association (BBA).

“These figures show that mortgage approvals are rising again after four months of decline,” said Richard Woolhouse, chief economist at the BBA. “That’s encouraging because those decisions are a leading indicator of what’s happening in the housing market.”

Richard Sexton of e.surv chartered surveyors concurred: “The temporary log-jam in the mortgage market [caused by MMR] is beginning to clear, and lending has returned to healthy sustainable volumes.

Financial incentive
We Brits are obsessed with homeownership for a various reasons, but a study by E.ON, conducted to explore people’s attitudes to home buying, revealed that the most important incentive for acquiring property is financial, with 67% saying the greatest advantage of owning a home is the long-term investment potential.

While there are clearly plenty of potential risks for London’s ebullient property market, there are reasons to believe that London’s property market will continue to strengthen moving forward.

The English capital has seen sharp increases in house prices in recent years because of a chronic lack of supply and intense demand, and despite the recent market slowdown those fundamentals broadly remain the same. This is fuelled by London’s powerful city economy, large inflows of foreign investment from wealthy rent-seekers and a rising population that is expected to outpace every other UK region by a sizeable margin and hit 10 million by 2030. This will almost certainly drive up demand for housing in the capital and in turn property prices.

Further room for growth
Accounting firm PwC estimates that UK house prices will increase by around 35% by 2020, led by gains in London, on the back of a supply-demand imbalance.

It also projects that the average price of a home in London could reach £500,000 by the end of 2014, following an annual price rise of 13% in the capital, compared to 8% nationwide.

Rising property prices could be a major factor that cause interest rates to increase sooner rather than later, but until there are more measures introduced to boost housing supply, property prices will almost certainly continue to appreciate long term.

Property market conditions may be improving in many UK regions, but the market in the capital remains in a league of its own.

Words:
Marc Da Silva
Property Market Specialist