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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.
Extended period of price re-alignment ahead
The next 12-36 months will see an extended period of price realignment as sales values adjust to weaker, more price sensitive and affordability constrained demand. Given the inelasticity of supply in London changes in the level of demand can feed quickly and disproportionately into pricing.
The impact on values across the price segments will depend upon the underlying profile of demand, the drivers of buying power and perceptions of housing value i.e. yields, return expectations and relative value against other investment options.
Housing demand in London comes from a mix of overseas buyers, domestic investors and domestic home owners. Investors, who nationally accounted for c25% of sales in 2016, do not need to buy in times of uncertainty. Recent tax and policy changes has impacted investor demand especially in low yielding, higher capital value markets such as inner London.
Domestic buyers purchasing homes to live in account for the bulk of demand but with London house prices at 14x average earnings stretched affordability levels are constraining demand, reducing the upward pressure on prices.
Lower turnover to act as a brake on price falls
We do not expect a rush of overseas or domestic investors looking to exit the market and force a major price correction. Rather we expect a further decline in sales volumes and a contraction in available supply to limit price falls in the near term.
Highest value markets the focus of price falls
The top end of the market is where prices have been more volatile historically. We expect further, single digit price falls over the course of 2017 extending into the top 2-3 price deciles. Prices are less volatile in the mid to lower value markets where we expect prices to remain broadly flat over 2017.
The map at Figure 4 profiles the distribution of the current £psf price deciles which have been grouped into 4 categories to assist identification of coverage and markets. The map is based on postcode districts (e.g. SE5) within the Greater London administrative boundary.
The top decile covers the highest values parts of central London including the City, Mayfair, St James’s, Belgravia, Knightsbridge, Chelsea, Kensington, Holland Park and Notting Hill. The 7th to 9th deciles cover the areas adjacent to the central core stretching out to Dulwich in the south, Twickenham Richmond and Kingston to the south west, Hammersmith and Ealing to the west, Hornsey and Hampstead to the north and Stoke Newington, Shoreditch and Bermondsey to the east. The rest of the price deciles cover the outer suburban parts of London’s wider region.
The areas of interest are those that are adjacent to higher deciles or to a degree surrounded by higher value areas. Notable locations are markets such as Peckham and Camberwell in SE London north of Dulwich. The area between Hammersmith and Ealing and north of Stoke Newington as some examples.Fig. 4 - Spatial distribution of London’s house price bands
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