Prices have increased across the UK over the past year, including in London, albeit the pace of price growth has been slower in the capital. So should people follow the crowd and buy outside of London, or is now the time to buck the trend and buy in London?
At PropTechPioneer, we think now is absolutely the time to buy property in London. We believe that London and the Southeast will experience significant increases and capital values and rentals. Here is why.
Lack of new housing supply in London
According to Molior, new construction starts have declined significantly. In 2021, work started on building just 16,640 new homes – 68% of these were in Outer London boroughs, while just 38% were in Inner London boroughs.
This is a decline of 8% in 2020 and 51% fewer units than 2015 (the record year). The number of new construction starts is 15% below the average level between 2009 and 2020.
In a city with such a chronic under-supply of housing, the decline in new construction will be felt for many years into the future. Many of the top-tier housebuilders who would have typically built in the capital are now focusing on developing outside of the capital. The costs of developing new properties in London mean there are only a small number of developers with deep enough pockets to build.
Additionally, because obtaining planning consent takes so long, (the average time to obtain consent in the UK is 2 years) it is unlikely that new supply will come on stream quickly. Lower supply will of course put additional upward pressure on property prices and rents.
New Construction Starts London (2009 – 2021)
Demand for Rental Property
Demand for rental property in London is outstripping supply.
According to London sales and letting agent Chase Evans, rents are already back up to their pre-pandemic levels, and in some buildings, rents have hit all-time highs. Their seven London branches are now busier than ever.
Chase Evans reports that since the end of lockdown, rents have increased by 25% to 30% on average. For example, one-bedroom apartments in a new development in SE1 which achieved £350 per week during the lockdown, are now achieving as much as £475 per week.
It’s a similar story for another development in Battersea, where manhattan (studio) apartments were renting for £360 per week during lockdown – deals are now being agreed at £450 per week, the highest price ever achieved for a studio in the building since its completion in 2017, the previous high was £390 per week.
So what is driving the rent increases? A lack of available rental stock causes it says their spokesman. “A year before lockdown, we were forecasting rents would increase over the next 12 months due to a lack of new apartments. Lockdown delayed the crisis and there are not enough apartments to satisfy the rental demand.” They also explained, “Average void periods are now just 3-7 days, with 95% of or new lets agreed before the apartment is vacant. For those investors monitoring their assets carefully, void periods of 2% will significantly drive the performance of their investment.”
Today, the vacant stock levels across all of their London branches are down by 92% compared to last year. Their offices are now running waiting lists for new apartments and the shortage is so acute that they can only secure homes for 8% of all those who apply.
Interest rates rise
Interest rates were at all-time lows. The Bank of England (BoE) made two emergency rate cuts in March 2020, to reduce the impact of coronavirus on the economy.
In response to rising inflation, the BoE announced two consecutive rate rises in December 2021 and February 2022. Interest rates are now at 0.5%. Interest rates remain low compared to historic averages, but with the BoE forecasting inflation to hit 7% (against a target of 2%) by Spring this year, interest rates will likely rise further.
Against this backdrop, investors can look to lock in fixed-rate mortgages now, before rates rise again.
UK is the first G7 country to emerge from COVID as London returns to ‘normal’
Life in the capital is returning to normal. All Covid restrictions ended in January 2022 and as of 11th February, there will be no travel restrictions for fully vaccinated people entering the UK.
On 19th January 2022, Boris Johnson announced that all working from home restrictions were lifted with immediate effect. Following the announcement, the following day, passenger numbers on the Tube increased by almost 10% compared to the same time a week prior, to over 1 million journeys.
Not everyone is moving to the country
There is no doubt that the way people work has changed; coronavirus has accelerated rather than caused this 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 change the physical attributes people demand in property rather than its location.
Grainne Gilmore, head of research property website Zoopla reports that they have already seen the market for apartments normalising, with a returning appetite from international buyers, employees, and students for city-center apartments.
Inflation
The BoE forecasts that inflation will rise to 7% in the Spring of 2022. Sharp rises in oil prices and bottlenecks in supply chains have pushed up inflation around the world. 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.
Construction inflation
Construction cost consultant Arcadis has 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% p.a. by 2024 and for this to become the normal growth. The reality is these costs will be passed on to consumers placing greater pressure on property prices.
Summary
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 the combination of each of these factors that we have outlined here 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 be well-positioned to take advantage of this. If you can afford to buy in London, our advice is, now is the time to do it!
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