What goes up, must come down? Maybe. Maybe not.
London property prices have gone up for a long, long time now. Few property markets in the world have generated the sustained levels of investment returns that London real estate has over the past two decades or more.
If you invested in London property back at the turn of the millennium when the average house price was £200,000 you’d be sitting on a return of investment of over 250% – the FTSE 100 barely broke double-figure returns over the same period.
Following such performance, London property prices hit an all-time high just a few months ago in November 2021, coinciding with the end of lockdowns in the UK. According to official Land Registry figures, an average annual increase of 5.1% was enough to make history with average asking prices hitting £519,934.
The figures were part inflated by pent-up demand bottle-necked during a covid-hit, partially operating housing market, plus a stamp duty holiday, but all indications suggest the market was truly buoyant. The number of offers accepted hit a decade-long high with central London properties leading the way – a 116% rise in demand. It was a similar story throughout London with buyer demand increasing 25% month on month and new buyer registrations doubling over the course of the previous 12 months.
And, yes, since that all-time high, the market has indeed softened. London property prices have fallen.
Recent headlines in the UK tell tale of a 1.8% dip from £519,000 to £510,000. It means that over the past 12 months, average London property prices have only increased by 2.2%, which is substantially less than the leading markets of Birmingham and Manchester.
However, it is important to remember these are top-line, average figures. London represents a massive market with one of the largest tenant populations in the whole of Europe. Indeed, investors with properties in some London boroughs actually recorded growth of up to 12.5% over the period.
Furthermore, demand remains strong. The majority of London agents are experiencing plenty of buyer activity and a shortage of stock. New-build properties continue to be sold off-plan, while existing properties continue to go beyond the asking price.
The recent dip is thought to be a small correction from the post-pandemic surge rather than anything more sustained. That’s what investments do. London property has produced sustained investor returns for such a long time and over the course of the last 20 years, there have been many short, isolated periods that have record slowing or even negative growth.
But what about the infamous bubble? Will the cost of living crisis finally burst London property prices to the extent that years of investment gains and capital value rises get wiped out?
People have been talking about the London bubble bursting for more than a decade.
It hasn’t happened yet, but it would be remiss to say that investors and homeowners aren’t facing a hitherto seen macro-economic environment. The UK has left the EU after almost 50 years and politicians are still looking to resolve many issues that affect business, trade and commerce on a daily basis. Then there is the pandemic. Covid not only slowed the world’s economies but also instigated historic changes in the way people work and live.
Right now in the UK, the cost of living crisis is headline news. Everyone – first-time buyers, homeowners, investors – are more aware of inflation than they were even a few months ago.
The Consumer Prices Index (CPI) rose by 9.0% in the 12 months to April 2022, up from 7.0% in the previous month while on a monthly basis, the CPI increased 2.5% compared with a rise of 0.6% in April 2021. Elsewhere, the Bank of England has raised the base rate of interest 4 times in the past 6 months.
But this has had little impact on the property market. Simultaneously to both the CPI figures and the latest base rate change, the most recent Royal Institute of Chartered Surveyors (RICS) survey indicated a large majority of surveyors (62%) expect house prices to continue to rise over the next 12 months. Furthermore, there was a +80 percentage point difference between the proportion of surveyors reporting rising prices and those reporting a fall – that’s actually a 6-percentage point increase on the month before.
RICS economist Tarrant Parsons noted: “Even though there is a lot of caution about the future economic landscape, it seems that limited supply available on the market, coupled with steady demand growth, are still the overriding drivers of house prices.”
It’s also important to note, that the turbulent economic environment is set to get worse before it gets better. The Bank of England has already stated inflation in the UK could exceed 10% later before 2022 finishes.
Rather than thinking a rising rate environment is a reason to not invest in London property, there is historic precedence to think the opposite.
Back in the early 1970s, spurred on by the onset of dual-income lending, UK property prices soared. Investors and homebuyers saw 2 periods of huge capital appreciation (this was prior to the days of the buy-to-let mortgage) in which prices doubled from £3,950 to £10,000 between 1970 and 1975, and then almost doubled again ( to hit £19,000) by 1980.
Then the 1980s happened.
It was a very volatile period for investors and the economy at large. Inflation hit 16% and rarely fell below 4% for a whole decade. Unemployment hit 12%. There were 2 separate recessions, one at the very start and one at the very end of the decade.
Despite having undergone outrageous 300+% growth in a short period before the 80s, house prices did not crash unlike stocks and other investments. In fact, they remained flat throughout the whole period and embarked on another growth curve by the early 90s. Furthermore, it’s important to remember what high inflation actually means: at CPI levels of 7% if you do nothing you are guaranteed to see your purchasing power fall over 6% every year.
Of course, past performance is no indication of future performance and no one is suggesting that the London property boom will continue forever, but currently the underlying supply and demand dynamics in London and the UK property market as a whole look favourable for investors.
Ahead of any acquisition, every investor should analyse the market’s specific supply and demand levels.
As detailed here, London real estate’s return on investment has been driven by a unique combination of the following factors:
London is a city with over 9 million residents and just 3.6 million homes. It’s a ratio that is massively undersupplied when you consider it’s a youthful population with a relatively low proportion of families. As it’s weighted heavily towards graduates and young professionals the ideal number of residents per household is low. So the city needs more houses already and forecasts suggest the imbalance is only going to sharpen – it is estimated the population will increase a further 10% in the next 20 years.
These are very strong investment fundementals and are what makes London property a safehaven in all economic conditions for many investors.