London is often considered the central property market of the UK, setting a precedent for how all other markets around the country will perform. It is also a key hotspot for buy-to-let investors. As such, we’re looking at how the London property market will fare in 2018…
Portico London estate agent has analysed the current market, in order to offer the most accurate forecasts for the coming year.
Falls in real wages and the economic and political uncertainty surrounding Britain’s upcoming departure from the EU resulted in a sluggish property market last year.
The volume of sales dropped by 24% over the year from July 2016 to July 2017, according to the latest Land Registry figures, and activity remains tentative.
Historically, sales volumes have tended to lead house prices, with the financial crash of 2008 being a very recent example. A decline in sales preceded a drop in the average house price at the beginning of 2008, just as the recession hit the UK. Volumes fell drastically and prices plummeted by 16.2% in the biggest drop for a calendar year on record. Interestingly, sales recovery then also preceded price recovery the following year.
Mark Lawrinson, the Regional Director of Portico, explains: “If we look at today’s market, the current transaction slowdown in central London is largely still a hangover from the change to Stamp Duty taxes two years ago, which saw an increase of Stamp Duty on properties over £1.1m.
“Then, shortly afterwards, the introduction of the extra 3% Stamp Duty charge for investors buying an additional home came into effect. This additional Stamp Duty explains the big jump in sales in the run-up to April last year, as investors rushed to purchase properties before the tax came into effect, and also explains the immediate fall.”
Sales volumes have been fairly consistently low since this fall, but they haven’t dropped sharply enough to lead prices like they did in 2008.
Why we’re not headed for a market crash
In the run-up to the financial crash of 2008, large UK mortgage lenders were offering to lend as much as 125% of a property’s value to hopeful homebuyers. Then, when the economy turned, the UK faced a negative equity crisis, as house price falls left thousands unable to move and stuck on high mortgages.
Lending then completely collapsed, despite the Bank of England (BoE) cutting interest rates by 0.5% to 4.5% in an attempt to boost bank lending, and there were just 300 or so mortgage products available on the market.
As a result, the few buyers that were in a position to proceed with home purchases delayed completing contracts or pulled out altogether, and sales came to a complete standstill.
Homeowners choosing to remortgage rather than move
Lawrinson looks at the trend to remortgage: “The difference between today’s property market and the market at the time of the last financial crash in 2008 is that, economically, people aren’t being backed into a corner – they have options.
“Wage growth continues to fall behind inflation due to the dramatic fall in the pound post-Brexit, and affordability is stretched, but interest rates are low and home sellers aren’t being coerced to drop asking prices to sell.
“So, rather than accepting a lower price than they’d like for their property and forking out on moving costs and Stamp Duty, homeowners are choosing to remortgage to make what they’ve got cheaper. And it’s low mortgage rates and a lack of housing that’s propping up house prices.
“In fact, the only reason why property transaction volumes aren’t zero is because people have to move because of lifestyle changes – getting married, starting a family, divorce, and death.”
He adds: “We’re in a stalemate position, and we’ll likely remain in it for the next 12 – 24 months.”
After decades of runaway house price growth, Portico expects the prime central London market to follow the pattern of the past year, with prices continuing to level or slightly drop as housing stock declines.
Lawrinson explains why: “The demand pool has always been the smaller at high price points and, combined with the sharp hike in Stamp Duty, new obligations on non-domestic foreign buyers and political instability, it’s no surprise that less people are prepared to make big investments.
“We don’t expect price falls to be sharp and drastic, more of a steady decline.”
A tale of two cities
However, the agent believes that London will be a tale of two cities this year, with the market remaining localised. Portico expects house prices in outer boroughs to steadily increase, with certain areas performing particularly well.
Two examples are Haringey and Newham, which recorded strong house price growth in 2017. Lawrinson believes that this trend will continue this year: “The Haringey Ladder is an area that has been overlooked and undervalued for years and has seen little gentrification, but it’s now following in Hackney’s rise to hipster heights and emerging as a key property hotspot. It has a vibrant high street and is on the doorstep of large green spaces, such as Finsbury Park and Alexandra Palace.”
He adds that there’s massive potential for house price growth in Haringey if the area undergoes investment in infrastructure: “If Crossrail 2 is given the green light, it’s very likely we’ll see significant change to this whole area, which will continue to push up house prices and rents significantly.”
Newham is also tipped for house price growth over 2018: “London’s Olympic Games revived east London’s fortunes, with huge-scale regeneration, which caused property and rent prices to soar. Stratford, in particular, bagged a gold medal in terms of investment in transport and infrastructure upgrades, and a huge number of people migrated to the area. A few years down the line, and people are beginning to push out to even more affordable areas, which have also benefitted from regeneration as a ripple effect.
“For years, Forest Gate has been an undervalued area, so prices here still have room to go up – unlike many areas in the capital. And, as we tiptoe closer to 2018 when services on the Elizabeth Line will start the run, demand for property in the area will soar.”
Sell before 2019
Henry Pryor, a leading property expert, forecasts a sluggish 2018, with a lack of buyer demand in the months leading up to Britain’s departure from the EU. If you’re looking to sell for one reason or another, it’s therefore sensible to put your property on the market in early 2018.
Pryor explains: “The quicksand in 2018 will be towards the end of the year, I suspect. Who is going to want to commit to their biggest single purchase in the six months leading up to our departure from the EU in May 2019? Many buyers will wait until the dust settles and, whilst there may be little practical difference having concluded our divorce, this may not be reflected in the housing market.”
He also advises sellers to not try and go it alone in a tougher market: “Buyers will become bolder in 2018, and the most successful sellers will be those who listen to the advice of the best agents. Too many people will make the mistake of thinking that they can buy and sell on their own and get caught out. Even now, a third of homes on the market have had to reduce their asking price at least once, and over half of homes listed in swanky Mayfair and Belgravia have been in the market for over a year!
“There is a market. There will be one in 2018, it just won’t be the same as the one we had a year ago.”
What about landlords?
The Head of Policy at the National Landlords Association (NLA), Chris Norris, expects landlords’ costs to increase this year: “We expect landlords’ costs to increase in 2018, mainly due to the tax changes, although the recent interest rate rise could also add an extra £20 a month to interest payments for every £100,000 of outstanding finance.
“Rental property can still be a worthwhile investment in 2018, and we expect new landlords to continue to enter the market, but the increased taxation of the sector, the 3% Stamp Duty surcharge on additional property purchases, and potential further rises to interest rates means it will become increasingly difficult for anyone considering their first steps.
“Because of those barriers, we’re expecting the buy-to-let market to become increasingly professional, with an increase in landlords switching to limited companies.”
However, Robert Nichols, the Chief Executive Officer of Portico, insists that there are plenty of clever ways that landlords can cut costs and continue to generate a healthy return on investment: “Location is imperative when choosing where to invest, and landlords need to drill into areas undergoing regeneration or investment on a street or postcode level to find the highest possible rental yields.
“Landlords also need to find smart ways to avoid voids and actually increase profits – and one way of doing so is by utilising Airbnb management. Currently, there are 53,080 active London rentals on Airbnb and a staggering 64% of those are owned by multi-listing hosts or landlords.
“Airbnb is an increasingly popular short-term solution for landlords (there’s an annual limit of 90 days for London hosts), who are utilising the site to A, synchronise their tenancy to begin in a busy season where they can command a higher rent and B, avoid void periods by putting their property on Airbnb until they find a long-term tenant.”
If you’re looking to invest in the capital this year, why not consider some of the key London property hotspots for 2018? Check them out here.