House prices in London are predicted to fall in real terms across 2017 – marking the first time this has happened since 2011. London saw house price inflation drop to 3.5% in April 2017 (down from 13% in April 2016), as the Capital sees a continued reduction in house price growth.
Hometrack UK Cities House Price Index, published May 26th, suggests that the price growth could slow to between 2% and 3% by the end of 2017, meaning that house prices may not keep up with inflation. Average prices in the capital still do stand at £489,400.
Predicting a 2% to 3% rise in London property prices this year, Hometrack’s report said: “With the level of inflation increasing, this means London is set to record a real terms drop in prices over 2017, the first time this has happened since 2011.”
This downward trend of house prices is further confirmed as the number of home buyers dropped by nearly a fifth in the first quarter compared to a year ago, according to the Council of Mortgage Lenders (CML). Just 16,700 loans were taken out in the first quarter, down 3% from the end of 2016 and 19% on the first quarter in 2016.
Remortgage rates did hit an eight year high due to low interest rates as interest rates continue to stay low. Paul Smee, CML director general, said: “Home buyer activity in London has fallen for the second quarter in a row. A traditional seasonal dip in activity in the winter months is expected, but it has been more pronounced in London compared to the UK overall, as persisting supply and affordability issues continue exerting ongoing restraint on growth. We do expect activity will pick up as we go forward into the summer months.”
London has seen runaway growth in house prices in recent years, driven largely by increases in Prime Central London boroughs such as Kensington and Westminster, but prices in less fashionable boroughs have climbed faster recently as buyers looking for affordable alternatives push up demand.
The central factor now driving the increase in discounted houses is affordability. Earnings to wage ratios, even in the capital’s less fashionable boroughs, have spiraled to the point where buying a property is beyond the reach of many prospective buyers, which has driven this year’s sluggish price growth.
Online estate agent eMoov confirms that average house prices in London are at least 12 times the average wage in the city. The largest gap exists in Hackney where exponential house price growth since the recession means the average property now costs £575,511 — that’s 17.03 times the average local wage of £33,800. The dichotomy between what buyers can afford and what vendors would like to be paid for their homes has led to a dramatic slowdown in the number of property transactions in London.
“House prices have stagnated over the past three months,” agrees Martin Ellis, housing economist for Britain’s biggest mortgage lender Halifax. “Housing demand appears to have been curbed in recent months due to deterioration in housing affordability driven by the sustained period of rapid house price growth during 2014 to 2016.”
In response to the obstacles faced by novice buyers, London Mayor Sadiq Khan has announced plans to develop up to 5,000 new affordable properties, the majority aimed at first timers. He will invest £115 million in the project, in partnership with Hyde Housing Association.
The Mayor describes the current situation as “simply unacceptable” but he also warns that solving the housing crisis “will be a marathon and not a sprint”. Lucian Cook, director of residential research at Savills, agrees that provision of new homes, including affordable properties, is one way to solve the crisis — although the numbers needed are huge. “We calculate that about 42,000 homes will be built in London this year,” he says. “The need is about 62,000.”
DMZ believes that the affordability crisis will continue to suppress house price growth in the capital.
We have seen a such long bull run in the London prices and when compared to the rest of the country the figures do feel unsustainable. There will continue to be much price elasticity between now and the election, with historical trends supporting such activity.
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