After two years of a booming UK housing market with annual house prices up 14.3% in the year to March 2022, the fastest pace of growth since 2004 according to Nationwide, the signs that the market may have reached its peak are starting to appear. Since the pandemic began, the market has seen great levels of housing demand in a limited supply pool, largely fuelled by last year’s stamp duty holiday, periods of low mortgage rates and the race for space as people sold their city homes and sought larger rural spaces with gardens and home offices. Competitive bidding and the rise of the cash buyer have been significant drivers in the buoyant housing market, with recent analysis reporting a 17% increase of cash buyers in the year to March against the three-year average before the pandemic, and of these cash buyers, property purchase prices were one third higher this year up to March compared to an average pre-pandemic year (FT, 2022).

However, since the first base rate increase to 0.25% in December, mortgage rates have increased on a weekly basis, and while there was little surprise the BoE announced a further rise to 1% on the 5th of May amid an ever increasing inflationary rate – now expected to peak just over 10% in Q4 of 2022 – the combination of increased mortgage costs with the cost-of-living crisis, soaring inflation and real wage* decline of 1% at the start of this year, has led analysts to predict a house price decline of 5% in 2023 and 2024 (FT, 2022). We have already begun to see a rise in down valuations across the UK, interesting all outside the Capital where house price growth has been the most significant over the last two years. The trend of down valuations suggests lenders are becoming more fearful over the market in the coming months and are acting cautiously, fearing the cost-of-living crisis and rising household and fuel costs may spark a fall in property prices. However, based on activity we are seeing from clients, London could buck this trend…

Why is London insulated against a housing market downturn?

London has been somewhat discarded from the housing boom, experiencing the weakest performance in house price growth of 4.2% compared to 9% in England overall in Q4 of 2021, with areas outside the Capital experiencing the greatest growth. While our preferences during lockdowns for location and types of housing shifted whilst we weren’t bound to city offices, Londoners are flocking back as offices reopen and the end of fully remote working. As a result, rentals across Western cities have been increasing fast, the average rental price in London up 4% since the Pandemic started, indicative of the sensitivity of rental prices to short term demand spikes against an inelastic rental supply (FT, 2022). Likewise, in Q1 of 2022, London saw an uptick in annual price growth to 7.4% (Nationwide, 2022).

We believe house prices in London are the least vulnerable to any potential future housing market downturn, firstly as this area saw the weakest house price growth and remains good value, and secondly, due to the security in being a major city and the centre of commerce and culture – the foundation of the demand is more clear-cut. As Zoopla reported recently, the average price for flats in London rose by only 2% since March 2020 and the potential value in this area in now powering demand. Similarly, Kensington and Chelsea saw the highest monthly growth in new supply in April at 53%, Zoopla reporting that this is indicative of the return of international demand into the London sales market, with some buyers noticing the value in central London where prices have risen more modestly than the rest of the country.

The market moving forward

The outlook for the UK economy is far from rosy, with the BoE stating Russia’s invasion of Ukraine and further supply side issues arising from Covid-19 developments in China adding to the perfect storm of factors pushing for a downturn in the UK and global economies. If a housing market downturn does come about however, we suspect London will be a safer investment as their house prices play catch-up. It is important to remember too that with recessions comes opportunity and potential for investment, and we have already seen a recent spark in buy-to-let and commercial enquiries from investors. Buy-to-let mortgage rates have remained relatively competitive in recent months and have been slower to rise than residential rates. With rental demand and prices across Western cities growing as they have lately, this may be a great time to take advantage of these relatively low rates and increase investments yields while possible. Property acts a great hedge against inflation, yet it is important to receive the right advice in periods where mortgage rates are rising fast and lenders are tightening mortgage affordability for both BTL and residential mortgages. Likewise, remortgaging now could potentially lead to significant savings in the long run if rates continue to rise.

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