Too Hot Too Handle?


With levels of demand in the capital incomparable to the rest of the country, London’s housing market is quite simply red hot.

Sealed bids, surging prices, the property market in London continues to boom at an astonishing rate. A penthouse in Knightsbridge recently sold for £140 million, annual prices in the capital are increasing at a rate of 17% and demand for homes is rising rapidly, fuelled partly by an influx of wealthy foreign purchasers. Doomsayers may forecast a toxic property bubble that could pop anytime soon, but there are signs to suggest that there is further room for growth in London, on the back of Britain’s economic recovery, falling unemployment, record-low interest rates, government-backed mortgage schemes and a chronic housing shortage.

Buyers paying more
At an average of 99%, the proportion of the asking price that property sellers are achieving in the capital remains high, according to property analyst Hometrack. Purchasers rush to compete for a limited supply of homes; it’s a seller’s market. “Everyone hoped for a spring bounce in the number of homes being put on the market, but it hasn’t happened,” said Simon Rubinsohn, the Royal Institution of Chartered Surveyors’ chief economist. This willingness from buyers to pay more is fuelling growth, with the average price of a London home rising by 17% compared to a median UK average of 8%, the Office for National Statistics (ONS) said. According to the ONS, a London home is now worth around £459,000, but the PwC forecast that this could rise to around £560,000 next year, due to the widening supply-demand imbalance. William Zimmern of PwC commented: “We estimate average house prices in London could grow by 13% this year and nearly 10% in 2015.”

Smartening Up
With some people seeing no end in sight to soaring prices, more homeowners are actively making improvements to their property in order to capitalise on further price gains, a Zoopla survey revealed. The survey of 4,972 homeowners found that 95% of people believe that prices will rise, at an average of 8.8%, between now and September, up from 74% a year ago. “Smart sellers are seeing all the signs of strong demand in the market and are looking to capitalise on potential capital gains to be had,” Zoopla’s Lawrence Hall said. With prices now 30% above the 2007 peak, there are mounting fears that London’s housing market is in ‘bubble territory’, posing the biggest risk to Britain’s economic recovery, according to the Bank of England (BoE) Governor, Mark Carney. The market growth, as previously mentioned, is being fuelled by high demand, driven partly by historically low mortgage borrowing rates. So is it time to increase interest rates?

Insane numbers colour the property market red-hot. From incredible prices in Knightbridge, spreading out slowly into the surrounding areas of Central London.

Interest rates
Mr Carney insists that there will be no rate rise to cool the market anytime soon because he believes that price growth is being caused by a chronic shortage of house building, suggesting that values may increase further, at least in the short-term. BoE’s Governor views interest rates as the “last line of defence” against the possibility that a bubble will form in the market, maintaining that rates would increase only when the wider economy requires it. Although a rate rise is unlikely to happen this year, many experts expect to see an increase in early 2015.

“With growth running strong in their forecast, surveys showing no signs of growth slowing and unemployment predicted to be close to 6% by the end of 2015, delaying a hike beyond the first quarter of 2015 would be untenable, in our view,”

said Rob Wood, chief UK economist at Berenberg. Despite Carney’s reluctance to raise rates, he claims that BoE has various tools at its disposal to help slow the housing market. This includes making it more expensive for banks to give out mortgages, cutting high loan-to-value lending, ending Help to Buy, among other measures. Carney said. “We have an ability to tighten certain mortgage affordability requirements and to discipline underwriting.”

Avoiding past mistakes
The last property boom, which peaked in 2007, was effectively built on high risk lending and borrowing, which eventually contributed to the financial crisis and housing market collapse. But now BoE has introduced tougher affordability tests, as part of the recent Mortgage Market Review (MMR), requiring lenders to check borrowing affordability more thoroughly. This is part of a long-term change in lending for homebuyers designed to ensure that the irresponsible lending that contributed to the last property crash is not repeated. MMR has potentially already contributed to a slowdown in mortgage lending, with data from the Council of Mortgage Lenders (CML) revealing a 16% fall in the number of new loans in the first quarter of 2014, compared with the previous three months. The CML’s Director General, Paul Smee, insisted “it will still be some time until we can assess its effect on the market”.

Lending cap
Lloyds Banking Group Plc, the UK’s biggest mortgage lender, recently imposed limits on lending to homebuyers borrowing £500,000-plus, restricting them to borrow four times their income, in a bid to counteract soaring home prices in London. Lloyds said the change was made in response to an “issue largely in the upper tiers of the London housing market” and estimates that it will impact on around 8% of their mortgage lending in the capital. “The move is designed to help cool house prices in London, and it could work, especially if other lenders follow suit,” said Jonathan Barrett, from Property Price Advice.

New homes
But despite genuine efforts from the banks to cool the market, BoE’s Mark Carney has warned of “deep, deep structural problems” in the UK market, and said the main problem was that not enough new homes were being built. Thankfully, there has been a sharp increase in the number of new homes being developed in England, with the latest data from the Department for Communities and Local Government showing that 133,650 new homes are currently in the process of being constructed, up 31% compared to 101,670 this time last year. Although the volume of new properties being delivered is less than half the 300,000 units a year that the Business secretary Vince Cable says is needed to meet rising demand, the house building sector is crucially providing the market with a fresh supply of properties, helping to boost transaction levels. The volume of residential property sales in April reached 103,690, up almost a third compared to the same month last year, HMRC statistics show.

Amount of ‘new builds’ 2005 - today

Soft landing
With mortgage lending conditions becoming more strict and interest rates set to eventually rise, London’s soaring prices will slow to more sustainable levels. The market braces itself for a soft landing, rather than a crash, and early signs are showing that this summer may be the start of a potential slowdown, in the upper end of the market at least.

The UK needs a stable housing market if it is to rebalance the economy but it also requires significantly more properties on the market to meet demand for housing, particularly in London; an international hotspot and one of the most desirable cities in the world. Until there is a sharp rise in house building levels, the supply-demand imbalance will only continue to place upward pressure of house prices.

The sun is shining
This summer promises to be a season with much to celebrate, and not just because Britain is expected to bask in the sunshine, as scientists forecast one of the hottest summers ever. With demand for property showing little sign of retreating, the traditional summer housing market slowdown may be just that, a pause in an alarming growth surge, as property reaches a point, at least for the meantime, that for some may be too hot to handle.

“The UK needs a stable housing market if it is to rebalance the economy but it also requires significantly more properties on the market to meet demand for housing”

Marc Da Silva
Property Market Specialist