The ratio of London to UK house prices is approaching its highest level for 30 years. This is in stark contrast to other areas of the country where pricing relative to the national average is more in line with long run norms. With UK house prices coming under renewed downward pressure just how far can London pull away from the rest of the market or will the gap start to close?
The widening gap between London and the rest of the market has been built off a much stronger recovery in values in London than has been the case nationally. This summer marks the five year anniversary of the start of the UK’s housing market down turn. By mid-2009 prices had fallen by an average of 15% and by considerably more in the most over-inflated markets. Prices initially recovered over late 2009 and 2010 and have been dragged slowly higher ever since by above average growth in London and the core commuter markets of the south east. Today headline prices are within 5% of their 2007 peak.
Cities such as London and Cambridge have seen capital values rise almost 30% off the lows of 2009 with prices around 10% above their peak levels. In the very central, prime residential areas of London values are over 40% above their peak levels.
At the other end of the spectrum there are many markets where values are bumping along the bottom with little impetus for growth. Liverpool and Glasgow are examples of cities where there has been limited growth since the lows of 2009 and where capital values remain 15% off peak levels.
Within this spectrum of recovery there is a clear north/south divide with locations closer to London seeing the strongest recovery in capital values. No wonder that house builders have focused their attentions on southern England where market fundamentals have remained stronger than the rest of the country.
The latest market evidence suggests that UK house prices are coming under renewed downward pressure as weak economic growth and fears over the Eurozone take their toll on consumer confidence. In recent months Hometrack’s survey of 1,500 agents nationally reveals growing evidence of a slowdown price growth across the South East. Although there is no sign of this trend spreading across Greater London, month on month price changes in central London are now below the average rate of growth for London.
London’s strong performance has been well documented. The capital’s housing market has been driven by an inelastic supply and strong overseas demand from buyers looking to invest in UK real estate as a hedge against global uncertainty. Yet London is a complex, highly segmented market covering a wide spread in values from many thousands of pounds per square foot in central areas to just over £200 per square foot in the outer suburbs.
There are parts of the capital where values are still as much as 15% below peak levels. Across London as a whole, half the market supports values above peak levels, while the other half is seeing values which are on average 7% off peak.
So long as the Eurozone crisis remains unresolved and sterling remains under-valued against the dollar so demand for central London property is set to remain strong. However, increases in stamp duty on residential transactions over £2m announced in the recent budget, together with a consultation on a proposed tax on the value of residential property worth over £2m owned by so-called ‘non-naturals’ will surely impact on demand for high value property in central London. With such an inelastic supply of housing in central London, any change in demand is likely to have a dis-proportionate impact on pricing levels.
The domestic market in London is driven by the fundamentals of economic growth, employment levels, rising incomes and interest rates. Segmenting house price growth across London reveals that price rises across the bottom 25% of the market are far more in line with national trend.
The ratio of London to UK house prices looks set to keep rising albeit at a slower rate in the short term as pricing across the UK weakens more so than in the capital. Much depends upon global events and how these impact on the continued attractiveness of London as a safe haven. Over the long run the gap between UK and London house prices has been widening, reflecting London’s growing standing as a global centre. At some point the gap will narrow but only when we begin to see an upturn in UK house prices. This is dependent upon an economic recovery and rising incomes across, which for the time being seems some way off.
Source: Hometrack using Nationwide house price index
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