When my spouse and I had been deciding the place to make our long-term dwelling, 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 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 pattern; one which, for the reason that second world struggle, has persistently seen extra Brits leaving London than transferring to it; and two: since home costs grew a lot faster in London than wherever else, we had been successfully committing ourselves to the “sluggish lane” within the UK’s two-speed property market. In all chance, we’d by no means be capable of 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 properties within the nation, this masks one thing that you simply not often examine: London’s property market has been stagnating for years.
Up 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 properties within the North West. Again in 2016, it will have purchased you 3.4 properties.
The irony is that demand for London properties has by no means been greater. After driving out the hunch brought on by Covid, town’s inhabitants hit a report excessive in 2023, with 8.95mn individuals. On condition that the ONS has just lately elevated its UK internet migration estimates for the 12 months to June that 12 months — and that London at all times attracts a big share of worldwide migrants — there’s probability 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 in the course of the early phases of a housing market cycle. Development begins within the centre earlier than spreading out throughout London and, if the cycle lasts lengthy sufficient, may attain someplace like Kilmarnock. In the course of the early phases of the cycle, youthful owners in London construct up fairness in smaller properties 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 buyers flooded in on the lookout for a cut price in Belgravia, Kensington and Chelsea. Worth will increase rippled outwards, first to the South East, after which to giant components 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 components of town, may 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 should 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 complicated, however its starting affords some clues. First the reform of stamp responsibility in December 2014 made it way 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 greater charge on further dwellings tax in March 2016 together with harder regulation on buy-to-let mortgages and the phased elimination of curiosity aid for higher-rate paying landlords from 2017.
All of which have lowered the attractiveness of shopping for funding properties, notably in markets with very low rental yields the place the precedence tended to be capital appreciation so long as the lease coated prices.
However it’s not simply landlords who’ve been affected by a harder lending surroundings. London’s first-time patrons have been hit hardest by the introduction of each the mortgage stress take a look at and the circulation restrict on lending above 4.5 occasions incomes. These have mixed to create a scenario the place you possibly can solely purchase you probably have an enormous deposit — £144,500 on common, in line with UK Finance.
So, not like 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 charge rises, numbers have fallen additional since then.
Whereas a interval of no or low home worth development whereas incomes catch up may appear to be the best resolution to stretched affordability, even this isn’t cost-free. The latest surge in worldwide migration and lowered first-time purchaser numbers have contributed to London’s report lease rises. In the meantime, those that have managed to purchase their first dwelling will discover it tougher to construct up fairness and will even discover themselves trapped in properties which can be too small, with some going through the extra problem of coping with the cladding disaster or discovering it tough to promote their shared possession dwelling.
The low ranges of transactions are extra of a priority, since it will possibly 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 impression on the variety of new properties being constructed, given many have been focused at both buy-to-let buyers or first-time patrons through Assist to Purchase.
Even the emergence of a brand new kind 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 properties to its housing inventory in 2023-24, the bottom stage 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 may assist some on the fringes, however their provide goes to be constrained they usually’re going to go well with 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 will enhance exercise with out inflating home costs — taxing individuals’s properties may work in concept however the political fallout wouldn’t be fairly, and funding for the variety of new properties required is a tough problem that can 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 Overview.
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 talent I needed to study early. However, no less than for me, the advantages of dwelling within the South West outweigh these of London. The coin selected improper 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
