Sell! Sell! Sell! Seems to be the only word on the streets nowadays when it comes to Property in London. On the face of things this may well makes sense, London house prices in the capital having been rising at astronomical rates for the last 10 years; so much so that almost any London resident feels priced out of the market nowadays. But what are the reasons prices may drop? What sequence of events could lead to a “correction” in the market? We’ve had a long think about this and spoken to our network of experts; this honed us in on the following reasons of concerns regarding a potential correction in the market.
1. Property price growth in London has far outpaced that in the rest of the country
If you look at prices over the last 3 decades comparing London prices to those in the rest of the UK, you will see one striking event. The gap between the two has been widening extremely quickly in the years following the global financial crisis as investors hungry for yield have been pilling money into the capital. But if you look at this same chart over a prolonged period you will see a clear cycle, the gap has consistently widen over a period and then narrowed following 10-15 years of hyper growth. Today that gap is wider than it has ever been which would suggest a reversion back to the mean is required. The message here would suggest that you should sell your house in London and buy one in the country.
2. New home supply is rising and fast
The age old saying that space in London cannot be grown and with a growing demographic demand and prices can only go up is starting to fade. If you look at the London skyline today all you can see is construction of high rise residential buildings. From the Battersea powerstation to the regeneration of Nine Elms or the many high rises being built in Canary Wharf it is really everywhere. In fact what you are seeing is demand creating its own supply. A PropertyVision report from last year noted that “the sheer scale and monumentality of the towers that are rising daily is in a league of its own” and counted 54,000 new flats on the way in central London.
With the arrival of Crossrail and other transport improvements parts of London which were previously considered as outer London as commutable to central London further increasing the potential for new supply to the London property market.
3. Government policy is being designed to discourage high house prices in London
Simply put the government is not keen on super high house prices in London. It looks bad. So they have been working to discourage foreign buyers with the higher stamp duty rates and the annual tax on enveloped dwellings (ATED) for houses bought inside companies. They also hit the market with the new rates of stamp duty for houses worth £1.5m plus and in April will implement rules which would mean that anyone buying a second home would be paying 3 per cent extra.
London used to be lightly taxed by international super city standards but this is changing and add to this the cuts in tax relief on buy-to-let interest and you can see a clear signal that change is wanted by the Government.
4. The Market is changing; fast!
London has long been a lovely haven for rich international buyers. But with commodity prices collapsing, Russia under sanctions and China slowing, the bread and butter of the high-end market isn’t as well off as it was. In fact we are starting to see a reversal in the Longterm trend which some high-end properties now being sold for some massive price cuts from “distressed sellers”.
5. Interest rates
The base rate in the UK has never been this low for such an extended period. The UK base rate today is 0.5 per cent but according to a number of experts the long term average and the economic rate is closer to 4 per cent. The impact on mortgages of rising interest rates will be huge!
Add all these up and the outlook for London may look pretty grim but here is the thing. London has always lived by its own rules. We need to remember how global the London property market is. With currencies moving around as much as they are, what may seem pricy in one currency could come across as quite profitable in another. And focusing back on interest rates for a moment, several central banks are now delwing with negative rates meaning they dont want to hold cash – they want savers to take the hit instead. If the current market environment continues, central banks will continue to cut rates and print more and more money. If this happens no one will want to hold cash and will move their money into other investments and London as it always has been will provide a home for all this cheap money trying to find a home.