Five simple reasons why London’s property bubble won’t burst

Rumours are rife that London’s property market is on the brink of a devastating bubble, and when it bursts everything will come crashing down around it. But it’s simply not true for some very basic reasons. So even if prices have gained 40% between 2013 and 2015, demand is still high and will continue to grow argues Yulia Kozhevnikova, a real estate expert from Tranio.com.

1. Population growth

The population in London is growing faster each year and there simply aren’t enough houses – a fact that many city dwellers are keenly aware of. Over the next decade, the city will gain another 100,000 inhabitants every year on average. In fact, the population is expected to hit 9.5 million by 2025 and 11.3 million by 2050. If London authorities really wanted to meet the housing demand for all these newcomers, they would have to build 40,000–50,000 new homes every year, compared to the current 24,000 per year planned between now 2016 and 2020.

Interestingly, London has only recently become “overcrowded” in technical terms: WW2 had such an impact on the city’s demographics that it was only in 2015 that Greater London was deemed overcrowded (the first time since 1939). Furthermore, Central London is still 1.7 million off the number of people that lived there in the early 20th century.

2. Unfulfilled construction potential

Population density in London is definitely not the highest in Europe, and that’s mainly because the Greater London Authority (GLA) development plan actually far underestimates development potential. Currently, there are about 101 people per hectare in Central London and Islington is the most densely inhabited borough at 138. However, that’s nothing in comparison to downtown Madrid (286/ha) and central Paris (213/ha). In fact, the British capital can handle an extra 1.4 million housing units, which is 1 million more than the GLA plan, according to Savills, a British-based global real estate giant. So as long as there are places with good infrastructure and low density, there will be excellent growth potential.

 

Construction potential vs. GLA urban development plan
Location Number of new homes planned
Development potential GLA plan
Central London 373,300 231,150
Fringe neighbourhoods 1,089,600 192,730
Total in London 1,462,900 423,880
Source: Savills

3. Crossrail

Speaking of transport, London’s forthcoming Crossrail is setting house prices on fire at many soon-to-be stations. Planned over an distance of 118km, it is currently the biggest infrastructure project in Europe. The line, to be commissioned in 2019, will connect 1.5 million people between Central London and the suburbs in less than 45 minutes. Prices in the neighbourhoods within walking distance of stations have jumped since the announcement and have been rising 5% faster than any other area since 2008.

 

Price growth near Crossrail stations,

Q2 2008 – Q3 2014

Station Price growth,

%

1 Bond Street 38.38
2 Acton 33.10
3 Farringdon 24.41
4 Paddington 23.72
5 Maryland 20.74
6 Forest Gate 18.73
7 Tottenham Court Road 17.66
8 Liverpool Street 17.58
9 Burnham 12.56
10 Shenfield 11.80
Source: Knight Frank

4. Affordable housing schemes

Most people can’t afford a home in London, it’s true. Furthermore, younger people are the most alienated from the property market, especially since wage growth has been weak at best, but mostly stagnant, since the crisis. Research by GoCompare.com, shows that a household needs to earn £140,000 per year to afford a home in the capital, compared to £50,000 anywhere else in the UK: the average Londoner earns £30,338 per annum. Luckily, the Bank of England is keeping interest rates low, which means that mortgages are “cheap”.

But let’s not forget the affordable housing schemes that have been put in place for first-time homebuyers. In London, the Help to Buy programme loans 40% of a house purchase worth up to £600,000. It’s interest-free for the first five years and then 1.75% in year 6, plus an inflation adjustment of + 1% every following year. The Starter Homes plan gives buyers under 40 a discount of at least 20% on the sale price. By facilitating locals access to property at discount rates, demand for real estate in the city is maintained.

5. Sustainable price growth

In 2014, house prices in the capital were 20% more expensive than anywhere else in the UK – a first for the city, even by pre-crisis standards. While it’s true that home values are still growing faster than nationwide, price growth is tapering off especially due to global events like the oil slump and local policies like higher stamp duty for luxury property and capital gains tax for non-residents. Strong prime property price growth generally indicates that more affordable segments like starter homes and trade-ups are becoming too expensive for average buyers. So the fact that annual price growth in prime Central London declined to 1.2% in January 2016, compared to 4.6% in January 2015, is a sign that the market is beginning to stabilise, not burst.

house_price_index

What to expect by 2020

Considering all of the above, it’s no surprise that housing is a major topic of debate for politicians and the media. At the same time, there are no long-term solutions on the horizon, meaning that shortages will no doubt continue to plague London for the foreseeable future. Nevertheless, research shows that price growth is stabilising but future buyers should still plan for another 15–25% hike between now and 2020.

 

Property price dynamics forecast in the UK and London,

%

2016 2016–2020
UK 4.1–5.0 17.0–22.8
London 5.0–5.5 15.3–24.0
Central London

(prime real estate)

1.0–2.0 17.0–20.5
Sources: JLL, Knight Frank, Savills

Yulia Kozhevnikova, Tranio.com