London property prices: Why are house prices set to soar?

Much has been made of recent property growth in the United Kingdom. But does working from home mean that London property prices will decline as people move to the county and commute to the city on an infrequent basis?

Are we in a bubble, is the rapid price growth in the UK merely a reflection of stamp duty holiday and will prices decline as stamp holiday ends? I don’t think this will happen; I think the opposite will occur.

I suspect we will witness significant increases in property prices again, especially in London and the southeast. Why will property prices grow and what are our predictions for the London market? Read more to find out …

London housing market predictions

Lack of new supply

New housing supply in Inner London has declined significantly. New construction starts, have declined by 45% from 10,113 in 2015 to just 5,559 in 2020.

It is worth nothing, that at the same time of this lack of new supply, the amount of unsold stock in new developments in some boroughs has increased. In Q2 2021, there were 1,661 completed and unsold apartments which is high by historical standards. But, much of this stock is at the upper end of the market, with almost 40% located in Westminster and Wandsworth.

Other parts of Inner London have very low levels of unsold completed stock apartments – for example, the City of London has just 40.

In a city with such a chronic under-supply of housing, the decline in new construction will be felt over the long term.

Already signs of things returning to ‘Normal’

Despite the impact of covid-19 on life in the capital, there are now signs of things returning to ‘normal.’ London’s transport network, bars, and restaurants are once again busy. In April 2021, London Underground use increased by 40%, and the transport network is rapidly filling again as restrictions are easing. In addition, with almost 80% of the UK population having had their second dose of the coronavirus vaccine, there appears to be little chance of any additional lockdowns.

Working from home doesn’t mean moving to the countryside

There is no doubt that the way people will work in the future will change; Coronavirus has accelerated this rather than created the change. However, it seems slightly naïve to believe that this new form of working will result in a mass exodus of people moving to the countryside and rarely traveling to their old place of work.

The reality is that most people will want greater flexibility to be able to work for part of their time from home, rather than a more drastic change of moving location completely. In fact, working from home will more likely will change the physical attributes people demand in property, than its location.

Interest rates

Interest rates are at all-time lows, but that is unlikely to last forever. The Bank of England (BoE) made two emergency rate cuts in March 2020, to reduce the impact of coronavirus on the economy. With interest rates cut to just 0.1%, the general expectation was that interest rates were unlikely to increase in the medium term.

However, as inflation increases there are now increasing signs that the BoE will be forced to start increasing rates sooner that initially anticipated. As interest rates begin to increase investors will more rapidly pile into the property market in order to lock-in lower rates.

Inflation

The National Institute of Economic and Social Research (NIESR) are forecasting inflation in the UK to increase to 3.9% next year. Sharp rises in oil prices and bottlenecks in supply chains have pushed up inflation in the UK, with inflation set to hit its highest level since late 2011. There are few signs that suggest pressure on either will abate either time soon, as the impact of coronavirus continues to impact other economies.

Real estate’s role as an inflation hedge makes it an attractive option to investors and as inflation starts to bite, investors will choose to buy property. The London property market will be a major benefactor because of its international blue-chip status.

Retrofitting secondary stock

Already benefiting significantly from the stamp duty holiday, the secondary property market has already experienced significant price growth over the past 12 months. Price growth is set to continue as other pressure is laid to bear on the secondary housing market.

Perhaps one of the most significant will be the costs to ‘green’ the UK’s ageing housing stock. Owners are set to be hit by significant costs to retrofit existing polluting homes as the UK’s tries to live up to its net zero carbon target by 2050. When and if they sell, vendors will seek to recover these costs when they sell their homes.

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Construction inflation

Cost consultant Arcadis have recently warned there are already signs of the construction industry overheating, with significant issues in the supply chain for materials, access to staff and increasing demand placed on the construction industry. For London in particular construction inflation is anticipated to increase by 5% year on year by 2024 and for this to become the ‘new normal’. The reality is these costs will be passed on to consumers placing greater pressure on property prices.

Income growth

Between the financial years of 2011 and 2020, median household income increased by just 7%, an average of 0.8% per year, after accounting for inflation. Predominantly caused by the impact of the Global Financial Crisis and lack luster economic growth caused by the fallout of the Brexit referendum.

However, there are now signs that household incomes are set to grow as many of the economic headwinds are behind the UK and low levels of unemployment and inflation put greater pressure on incomes. Increases in income and prosperity will create greater demand for new housing again putting greater pressure on prices.

London property prices and growth

London continues to have the highest average house prices in England, recorded at £494,673 in July 2021. Despite the headlines of London property prices ‘falling off a cliff’ during the pandemic, it’s interesting to note all regions in England following the same price trends, as can be seen in the chart below from the Office for National Statistics.

London and England property prices

It’s the combination of each of these factors that will once again put significant upward pressure on UK housing, particularly house prices in London.   

The market fundamentals of supply and demand, supported by the factors we have discussed here will mean that it’s hard to forecast anything other than house price rises.  

The opportunity presenting itself for first time buyers and investors is huge. Those ready to buy and invest now should are well positioned to take advantage of this.

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