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The Enduring Crisis of the London Housing Market

BY CRYSTAL PALMER , 27/11/2016


The prices of London homes have been growing incessantly since the financial crisis. Is the bubble yet to burst? Or has it already? With the unpredictability of the market, greatly swayed by political and economic shocks, it is often hard to tell. Indeed, it would be more appropriate to characterise the London housing market as a wave rather than a bubble: as the effects of one shock subside, another begins.

Despite the paramount efforts against it, London house prices still appear to be on the rise.  This is in no small part due to lack of supply, as more and more workers scramble to live in the city. The present and future shortfalls of supply are highlighted by the Town and Country Planning Association’ s (TCPA) estimates that 56,400 new homes will have to be built to meet demand every year. (IB Times, 2016) Even if demand were satisfied, however, the market would most likely be inaccessible for middle-to-low income households. As a result, the Local Government Association (LGA) has set up schemes for greater local council discretion in borrowing and funding to help struggling first-time buyers. (BBC News, 2016) In addition to that, Theresa May’s pilot speech as Prime Minister also proposed housebuilding to help reducing such  “injustice” (The Week, 2016), highlighting the negative skew towards young people who are increasingly unable to get onto the property ladder.

Foxtons, a British estate agent, has reported that private rentals in London have doubled in the last 10 years, “with nearly 30% now living in private rented accommodation.” (The Guardian, 2016) By renting homes, people are effectively entering a self-perpetuating spiral, whereby the capital they have and the money they earn pays the rent, leaving little to no savings available towards a deposit. Therefore, a large proportion of renters might not be able to access the housing ladder until several years later than expected. Rental fees for private accommodation may fall, however, as more lettings agents enter the market; this might in turn cause a welcomed reduction in rental prices. The market for lettings agents will experience shifts to an oligopoly-type structure, more than the former monopolistic or imperfect competition-type structures respectively,  as illustrated in the graphs below:

A further statistic that captures the dramatic conditions of London’s housing market is provided by The Telegraph, which states that over “50,000 London pensioners are property millionaires.” (The Telegraph, 2016) The older generations are in fact benefitting from the recent exponential upsurge of property prices in previously undesirable areas, which have been affected by the spill-over from prime markets. As demand continues to increase, people begin to search out of the inner boroughs and resign to longer commuting times. Moreover, as people choose to start families, bigger, suburban houses become more attractive, and areas with good schools, accommodative playgrounds and leisure facilities are prioritised. Such occurrences are not a micro-trend – 12 of the 20 outer London boroughs “are recording double-digit price growth” (IB Times, 2016), as families, investors, and first-time buyers London inhabitants are choosing new locations, allocating their money elsewhere in London. Investors have grown impatient with the low levels of growth in inner boroughs (IB Times, 2016), so have switched their focus to the suburbs. Furthermore, first-time buyers, many of whom are typically young, ambitious, and low on savings, are choosing to move to the outer boroughs due to the lower price brackets of housing available – closer to the national average of £205,715 (Nationwide, 2016) according to data provided by Nationwide.  This, however, causes further spillovers: for example, house prices in South East London have grown dramatically, with boroughs such as Lambeth, Southwark, Lewisham and Greenwich now having average rents of over £190 a week for a single room. (Gumtree, 2016).

All such factors have caused regulations to reduce the disparities between London’s housing market and the rest of the country to be implemented.  The Stamp Duty Land Tax – a tiered tax based on the buying price of both residential and non-residential properties- was raised in April to an additional 3% payable if the property is buy-to-let. This reduces the appeal real estate investment in London, especially considering that most properties are now valued over £250,000, meaning that buyers will have to pay a hefty 8% duty. London house prices – particularly those over the £1.5 million mark- may even fall, as buyers will seek cheaper properties to avoid such substantial duties. This explains why investment in real estate in the North could become more popular among overseas investors.

Although London has traditionally been the powerhouse of the UK’s housing market, this might be changing. Improvements in infrastructure and scarcity of housing have led to capital outflows to other cities, such as Manchester or Liverpool. Initiatives, such as George Osborne’s ‘Northern Powerhouse’ project have meant that new investment opportunities have been opened to foreign investors, and have dramatically increased the volume of real estate transactions in the North (BBC News, 2016). For instance, several public and private initiatives were launched in China to encourage investors to buy properties and plan construction ventures in Northern markets. Furthermore, the announcement of the extension of the £55 billion HS2 rail network to Leeds and Manchester has made such investments even more appealing. These developments have prompted the Royal Institution of Chartered Surveyors’ (RICS) to forecast that London house prices will to “fall significantly” within the next three months, whilst prices in the North West will “soar” (BBC News, 2016).

The scenario presented so far might be completely turned by the result of the recent referendum on the UK’s EU membership.  Uneasy anticipation prior to the vote was experienced, with Foxton’s reporting a 42% profit slump in the first half of 2016, caused by the “uncertainty” and “confusion” prompted by the prospect of Brexit (The Guardian, 2016). Foxtons predicted this down spell to continue for the next half of the year. Nonetheless, national house prices still defied expectations, rising 0.5% in July (The Guardian, 2016). This seemingly surprising statistics can nonetheless be explained by the sharp fall of the pound in the aftermath of the vote to a 31-year low of 1.3224 against the dollar (BBC News). Estate agents were reportedly inundated with calls from foreign buyers eager to exploit the cheaper currency to secure bargainous long term investments. Buy-to-let investors were also advised not to worry as continuing uncertainty would reduce the volume of transaction and thus encourage renting. The effect of Brexit is in fact not yet clear:  UBS reports another real-estate-led crash to be unlikely as the strict law enforced since the 2008 recession has meant that the leverage ratios on mortgages are lower (The Telegraph, 2016).

The Bank of England’s response to the threat of Brexit will also affect the housing market. On Thursday 4th August, the Bank of England voted to reduce interest rates from their post-recession rate of 0.5% to 0.25%, and increase the level of quantitative easing to £60 billion. A cut in interest rates means that flexible rates and tracker mortgages should be seeing a decline in the levels of their mortgage repayments. It may also encourage more first time or buy-to-let buyers to take advantage of the relatively lower cost of house-buying. However, as expectations pre-referendum were anchored on a future rise in interest rates, “almost 90 per cent of new loans were fixed rate” (The Independent, 2016), leaving few likely to benefit from the rate reduction. Borrowers with fixed rate mortgages, in fact, will now have to pay a higher relative premium on their mortgage than those currently being offered.  

Overall, the London housing market has historically resisted economic and political shocks. The relative stability of prices following Brexit, in fact, demonstrates that the major driver of house prices is indeed foreign investment. Nonetheless, the expansion of real estate investment in the North might mitigate the London market volatility in the long-run. Yet the future is as unpredictable as ever, with ongoing negotiations to exit the EU, Theresa May as newly appointed Prime Minister, and the hints of interest rates hitting very near to zero by the end of the year. What is known for sure, however, is that the London housing crisis will endure for many years to come.


is a 2nd year student of the BSc in Economics and Management at King’s College London.


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