London's housing market has been bubbly for years. Since 1990 the price of the average house in the capital, once adjusted for inflation, has tripled. That growth has far outstripped what has been seen in the rest of Britain. Yet the market has turned of late - and in a big way. As recently as 2014 London’s house prices were growing at 20% a year, but they may now be falling. What has changed?
A particular pocket of weakness is London’s “prime” market, which is often defined as the priciest 5-10% of homes. Prime prices in central London are 15% below their peak of three years ago. In Kensington and Chelsea, the city’s poshest borough, house prices have tumbled by 15% since January. The prime market is struggling in part because of Brexit. Some plutocrats have already left; others want to rent, not buy. Yet other factors have played a bigger role. In 2014 the government made changes to stamp duty, a tax on homebuyers, raising it for those buying houses worth more than about £1m ($1.3m). Recently stamp duty became heavier still for those purchasing second homes. London is stuffed with luxury pads - the city has over half the houses sold in Britain that cost more than £1m - so it is feeling these measures most keenly.
Yet London’s prime market is not alone. In all price brackets, prices are less bubbly than they were a few years ago. One possible explanation is increased supply. Lately London’s rate of house-building has risen. Last year the stock of housing in the capital grew faster than it did elsewhere in England. Extra supply has added to downward pressure on prices. Changes to financial regulations have also had an impact. New rules to bolster Britain’s financial stability, which were introduced in 2014, have dissuaded banks from doing too much lending at big multiples of income. Since then, the number of mortgages granted to first-time buyers in London has slumped by over a tenth, while rising elsewhere. With many potential buyers in the capital in effect forced out of the mortgage market altogether, demand has been dampened.
The growth in property prices may have slowed in London, but the relief could be short-lived. Industry estimates suggest that the rate of building is likely to slow; housebuilders are worried about Britain’s economic prospects. And even if prices go nowhere for years, London will still be an extremely expensive market. If current trends persist, the ratio of London’s house prices to household income will not fall back to its long-run average until 2040.
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