When my spouse and I had been deciding the place to make our long-term residence, we flipped a coin. Heads, we’d keep in London. We had each moved to the town to review within the early 2000s; it’s the place we first met and I began my profession. Tails and we’d transfer to the South West.
The coin got here up heads. However within the second of flipping, we each realised we most popular the concept of transferring away. Bathtub is the place we ended up.
On the time two issues occurred to me: first, we had been following a well-worn development; one which, because the second world warfare, has persistently seen extra Brits leaving London than transferring to it; and two: since home costs grew a lot faster in London than anyplace else, we had been successfully committing ourselves to the “sluggish lane” within the UK’s two-speed property market. In all probability, we’d by no means be capable to afford to purchase ourselves again into the town.
Or so we thought. As a result of, 15 years later, whereas the capital nonetheless has by far and away the most costly houses within the nation, this masks one thing that you simply hardly ever examine: London’s property market has been stagnating for years.
Previously decade, London home costs have elevated by simply 13 per cent — that quantities to a 16 per cent fall in actual phrases. For the town’s common home value you would purchase 2.4 houses within the North West. Again in 2016, it will have purchased you 3.4 houses.
The irony is that demand for London houses has by no means been greater. After driving out the stoop brought on by Covid, the town’s inhabitants hit a report excessive in 2023, with 8.95mn individuals. Provided that the ONS has not too long ago elevated its UK web migration estimates for the 12 months to June that 12 months — and that London all the time attracts a big share of worldwide migrants — there’s an excellent likelihood its inhabitants hit one other report excessive six months in the past. Whereas this has helped drive up rents to report ranges, it’s barely touched the gross sales market.
So how has this occurred?
Often, London takes the lead throughout the early levels of a housing market cycle. Progress begins within the centre earlier than spreading out throughout London and, if the cycle lasts lengthy sufficient, would possibly attain someplace like Kilmarnock. Throughout the early levels of the cycle, youthful owners in London construct up fairness in smaller houses earlier than buying and selling up into extra reasonably priced areas additional afield — in flip serving to to unfold the market cycle.
This occurred after the monetary disaster, as worldwide traders flooded in in search of a cut price in Belgravia, Kensington and Chelsea. Worth will increase rippled outwards, first to the South East, after which to giant elements of the remainder of the nation.
However the final eight years have seen London home costs stultify, weighed down by declines in its posh central areas.
The latest stagnation, particularly in outer, extra reasonably priced elements of the town, might be clearly tied to the rise in rates of interest: London’s excessive costs make the market extra depending on excessive loan-to-income mortgages and landlords need to put up with a lot decrease rental yields, in contrast with the remainder of the nation. With out a correction in costs, we’ve ended up in a stand-off the place few individuals can afford or are prepared to purchase whereas even fewer must promote.
The longer-term stagnation is extra advanced, however its starting affords some clues. First the reform of stamp responsibility in December 2014 made it far more costly to purchase higher-value properties.
This began the slowdown in central London however was rapidly added to by the introduction of the extra greater charge on extra dwellings tax in March 2016 together with more durable regulation on buy-to-let mortgages and the phased elimination of curiosity aid for higher-rate paying landlords from 2017.
All of which have decreased the attractiveness of shopping for funding properties, significantly in markets with very low rental yields the place the precedence tended to be capital appreciation so long as the lease lined prices.
Nevertheless it’s not simply landlords who’ve been affected by a more durable lending setting. London’s first-time patrons have been hit hardest by the introduction of each the mortgage stress take a look at and the stream restrict on lending above 4.5 occasions incomes. These have mixed to create a state of affairs the place you’ll be able to solely purchase if in case you have a large deposit — £144,500 on common, in response to UK Finance.
So, in contrast to the remainder of the nation, the place first-time purchaser numbers really recovered to pre-financial disaster ranges, in London they fell away in 2014 and didn’t even handle to hit their earlier peak throughout the post-pandemic mini-boom. Inevitably, given mortgage charge rises, numbers have fallen additional since then.
Whereas a interval of no or low home value development whereas incomes catch up would possibly seem like the perfect resolution to stretched affordability, even this isn’t cost-free. The latest surge in worldwide migration and decreased first-time purchaser numbers have contributed to London’s report lease rises. In the meantime, those that have managed to purchase their first residence will discover it tougher to construct up fairness and will even discover themselves trapped in houses which are too small, with some going through the extra problem of coping with the cladding disaster or discovering it troublesome to promote their shared possession residence.
The low ranges of transactions are extra of a priority, since it will probably result in the inefficient use of the housing inventory, scale back labour mobility and decrease the federal government’s tax-take. It additionally has an influence on the variety of new houses being constructed, given many have been focused at both buy-to-let traders or first-time patrons by way of Assist to Purchase.
Even the emergence of a brand new sort of purchaser, institutional Construct-to-Lease landlords, couldn’t stave off a drop in housing supply. Final week’s information from the federal government confirmed that London added simply 32,162 houses to its housing inventory in 2023-24, the bottom degree since 2014-15.
Thus far, makes an attempt to de-zombify the London market look impotent. Longer-term mortgage merchandise and people with greater earnings multiples would possibly assist some on the fringes, however their provide goes to be constrained and so they’re going to go well with even fewer. The value warfare between lenders has abated too, with mortgage charges again up above 4 per cent once more.
The query for policymakers is how they will enhance exercise with out inflating home costs — taxing individuals’s houses would possibly work in principle however the political fallout wouldn’t be fairly, and funding for the variety of new houses required is a troublesome problem that may require more cash. And we’ll have to attend even longer to seek out out who’s getting any given the delay to the Spending Evaluate.
Transferring away from the capital comes with loads of compromises. Studying to control the time when spending a night out in London so that you didn’t miss the final prepare was a ability I needed to be taught early. However, a minimum of for me, the advantages of residing within the South West outweigh these of London. The coin selected fallacious and we received it proper. Even the information is beginning to agree.
Neal Hudson is a housing market analyst and founding father of the consultancy BuiltPlace
