When my spouse and I have been deciding the place to make our long-term house, we flipped a coin. Heads, we’d keep in London. We had each moved to town to check 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 well-liked the thought of shifting away. Tub is the place we ended up.
On the time two issues occurred to me: first, we have been following a well-worn development; one which, because the second world struggle, has constantly seen extra Brits leaving London than shifting to it; and two: since home costs grew a lot faster in London than wherever else, we have been successfully committing ourselves to the “gradual lane” within the UK’s two-speed property market. In all chance, we’d by no means have the ability to afford to purchase ourselves again into 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 just not often examine: London’s property market has been stagnating for years.
Prior to now decade, London home costs have elevated by simply 13 per cent — that quantities to a 16 per cent fall in actual phrases. For town’s common home worth you possibly can 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 increased. After using out the droop attributable to Covid, town’s inhabitants hit a document excessive in 2023, with 8.95mn individuals. On condition that the ONS has just lately elevated its UK web migration estimates for the 12 months to June that yr — and that London all the time attracts a big share of worldwide migrants — there’s likelihood its inhabitants hit one other document excessive six months in the past. Whereas this has helped drive up rents to document ranges, it’s barely touched the gross sales market.
So how has this occurred?
Normally, London takes the lead in the course of the early levels of a housing market cycle. Development begins within the centre earlier than spreading out throughout London and, if the cycle lasts lengthy sufficient, would possibly attain someplace like Kilmarnock. Through 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 places additional afield — in flip serving to to unfold the market cycle.
This occurred after the monetary disaster, as worldwide traders flooded in on the lookout for a cut price in Belgravia, Kensington and Chelsea. Value will increase rippled outwards, first to the South East, after which to massive 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 current stagnation, particularly in outer, extra reasonably priced elements of town, will 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 must put up with a lot decrease rental yields, in contrast with the remainder of the nation. And not using a correction in costs, we’ve ended up in a stand-off the place few individuals can afford or are keen to purchase whereas even fewer must promote.
The longer-term stagnation is extra complicated, however its starting provides 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 shortly added to by the introduction of the extra increased price on further dwellings tax in March 2016 together with more durable regulation on buy-to-let mortgages and the phased elimination of curiosity reduction for higher-rate paying landlords from 2017.
All of which have diminished 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.
But it surely’s not simply landlords who’ve been affected by a more durable lending surroundings. London’s first-time consumers have been hit hardest by the introduction of each the mortgage stress check and the stream restrict on lending above 4.5 instances incomes. These have mixed to create a scenario the place you possibly can solely purchase when you’ve got an enormous deposit — £144,500 on common, in line with UK Finance.
So, in contrast to the remainder of the nation, the place first-time purchaser numbers truly recovered to pre-financial disaster ranges, in London they fell away in 2014 and didn’t even handle to hit their earlier peak in the course of the post-pandemic mini-boom. Inevitably, given mortgage price rises, numbers have fallen additional since then.
Whereas a interval of no or low home worth development whereas incomes catch up would possibly seem like the best answer to stretched affordability, even this isn’t cost-free. The current surge in worldwide migration and diminished first-time purchaser numbers have contributed to London’s document lease rises. In the meantime, those that have managed to purchase their first house 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 tough to promote their shared possession house.
The low ranges of transactions are extra of a priority, since it could result in the inefficient use of the housing inventory, cut 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 consumers through Assist to Purchase.
Even the emergence of a brand new kind of purchaser, institutional Construct-to-Hire landlords, couldn’t stave off a drop in housing supply. Final week’s knowledge 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.
Up to now, makes an attempt to de-zombify the London market look impotent. Longer-term mortgage merchandise and people with increased earnings multiples would possibly assist some on the fringes, however their provide goes to be constrained they usually’re going to swimsuit even fewer. The value struggle between lenders has abated too, with mortgage charges again up above 4 per cent once more.
The query for policymakers is how they’ll increase exercise with out inflating home costs — taxing individuals’s houses would possibly work in idea however the political fallout wouldn’t be fairly, and funding for the variety of new houses required is a tough problem that may require more cash. And we’ll have to attend even longer to search out out who’s getting any given the delay to the Spending Evaluate.
Shifting away from the capital comes with loads of compromises. Studying to regulate the time when spending a night out in London so that you didn’t miss the final prepare was a ability I needed to study early. However, at the least for me, the advantages of dwelling within the South West outweigh these of London. The coin selected fallacious and we bought it proper. Even the info is beginning to agree.
Neal Hudson is a housing market analyst and founding father of the consultancy BuiltPlace
