The London housing cycle – where next?
- London house prices have grown by 80% over the last 8 years. The recovery has been led by the highest value markets where prices are now falling by -5% year on year.
- The next 1-3 years will see a period of price adjustment coupled with lower turnover. Price falls are expected to be concentrated in the upper half of the price distribution.
- Uncertainty over the medium term impact of Brexit on the London economy and a lack of relative value creates a challenging outlook for the next phase of the London housing cycle.
New Insight paper presents unique analysis of the profile of London house price growth by price segment with commentary on the current outlook.
A new perspective on house price growth in London
This paper presents new, unique analysis of the profile of house price growth across London since 2009. We examine house price inflation across ten equal sized price bands covering the cheapest to most expensive markets. We find the timing and scale of price growth has been far from uniform providing important context as we look ahead to the prospects for the next 12-36 months.
5x variance from lowest to highest value markets
As a global city, London’s housing market covers a wide range of sub-markets with different drivers of demand. Average values in the most expensive areas of London are 5x higher than the lowest value areas.
Figure 1 plots average £ per square foot (£psf) capital values across ten price bands or ‘deciles’ for the London housing market. The 1st decile covers markets with the lowest 10% of prices where prices average £290psf. This increases to an average of £1,530psf for the 10th decile covering the most expensive 10% of homes. Values at the upper end of the top decile rise exponentially towards £5,000psf and higher. Figure 4 provides a spatial distribution of the price deciles.
Timing and scale of growth varies across price bands
Since 2009, all markets have registered a broadly similar level of capital growth but the timing and scale of price increases has varied over this period. Figure 2 plots total house price growth within each price decile since 2009. The columns split growth into the ‘early recovery’ period between 2009 and 2012 and the more recent growth phase from 2013 to 2016.
Highest value markets recover over 2009-2012
The top 3 price deciles registered the highest growth in the early phase of the recovery before 2012. This was a result of strong demand for central London property from equity rich overseas buyers who saw London as something of a safe haven from global uncertainty. At the same time, wealthier London households felt the benefits of economic recovery more quickly and with easier access to mortgage finance they also bid up the cost of housing across higher value, inner London residential markets.
Lower value segments start to recover from 2013
In contrast, the lower price deciles, covering homes for the ‘average Londoner’, only started to register stronger growth from 2013. An improving economic outlook and mortgage availability, together with lower borrowing costs, boosted demand. House price inflation followed the flow of demand which moved out from central areas as buyers sought better value. Price growth pushed down loan to values, creating additional borrowing capacity.
Top price band areas registering annual price falls
Just as the top end of the market led the recovery so it is now leading the slowdown. House prices in the top decile are currently registering price falls of 5.1%. This is down to weaker demand, multiple tax changes and fears over the impact of the Brexit vote on the London economy. The impetus for house price growth continues in the bottom price decile where prices are rising at 8% year on year. Yet the underlying trend across all price bands is that house price growth is slowing rapidly towards low single digit rates of inflation led by the highest value areas.