London Housing report February 2012

The London prime market is leaving the rest of the UK behind as prices for the capital’s most expensive properties have increased 8% over the past year, according to the latest figures from property website PrimeLocation.

Although new demand to buy houses is still relatively weak because of the low supply of mortgages, new demand to live in houses is growing as always with new household formation and this, in the face of low new supply, is raising rents. Housing prices in Central London, are now responding to the higher rents.

Thus we have a market in which few new houses are being built or bought but rents are rising to force growing demand into equality with slow-growing supply. Prices are still overhung and sluggish because of the financial disarray and concerns about the riskiness of the market.

Over the slightly longer-term the boost from the 2012 Olympics is expected to be felt over the course of next year and beyond, as the improvements to the infrastructure and facilities within London and the influx of both visitors and investment make London an ever more attractive proposition.

About London house prices we can say:

- The recovery in London’s luxury housing sector over the past two years can be at least partly explained by the fall in the value of the pound, which attracted an influx of international buyers. The post-stimulus bounce in asset values, as hot-money sought safe haven investments, coupled with the recovery in the global economy, also contributed to London’s property revival.

- Most recently, London has of course outperformed as its economy has begun to separate from the rest of the UK and has strengthened at a time in which other regions still struggle.

- This pattern throughout the next 5 years and in the period 2012 to 2016 London is forecast to see house prices increase by a cumulative 20%.

Current housing market issues:

- Central West London has seen real price and rental growth over the last 12-18 months from international investors/occupiers looking for a safe haven for their money.

- Areas of strength have concentrated in the traditional medium to high value areas where purchasers are less mortgage dependent.

- New development is still well below normal levels in particular for apartment schemes where viability problems limit development to core Central London and high value suburban locations only.

Drivers of change and 5 year outlook:

-We expect continued but moderated house price growth in Central areas.

-The continuing shortage of stock within the financial reach of first time buyers will drive an ever strengthening rental market, thereby underpinning this price growth.

- We do, however anticipate a further widening of the value/rental gap between the medium/upper market areas compared with the lower mass market locations.

- London´s unique economic cycle means it will avoid the pricing decline in the middle of the forecast period expected in the majority of the UK.

Key points:

- London and southern markets, and particularly prime markets, are different. They have seen a V-shaped recovery as opposed to the L-shape of other regions. This is because they are capable of being driven by buyers with large amounts of equity and low reliance on borrowing.

- Underpinned by a stronger rental market and demand for medium/upper market properties, growth will be moderate but far healthier than elsewhere in the UK in the coming period.

- Prime London is different again as it belongs to a different class of world cities. The downside risks in this market are factors which diminish the creation of global wealth, such as commodity prices and appreciation in the sterling exchange rate. While global economic turmoil persists and the global rich seek a safe-haven store of wealth and a sterling-denominated currency play, property in Central London will prosper.

 Source: Knight Frank & BNP Paribas Real Estate

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