Doomsayers may predict a lethal property bubble, but the capital’s market is powering the rest of the economy – and buyers get more for their money than in rival global cities…
Within recent days there have been announcements that the number of property millionaires in Britain has doubled in the past five years to 400,000, and that the average London home will cost almost £650,000 by the end of the decade.
Accompanying such dramatic updates has been the usual chorus of concern − that younger generations will find it harder still to get on to the housing ladder, that London is becoming unhealthily detached from the rest of the country and that house price rises are inflating a bubble which will one day burst, with calamitous consequences.
Amid this debate, The Telegraph has been investigating the property scene, not just in the capital but across the rest of the country, to gauge its prospects.
We have also sought to establish how it compares with the housing market around the world, to assess how London, in particular, sits within the global picture.
This newspaper’s research, using data and analysis amassed by several leading estate agents and property experts, shows:
• How extensive the boom in the heart of London has been, with prices 27 per cent above their peak in 2007.
• How this soaring market has helped other areas by acting as an engine of wealth and a counterbalance to the economic downturn.
• How house price rises have already started to ripple out of London, initially into suburbs and commuter towns, but, in the coming years, across the rest of the country. Evidence of this comes from the Royal Institution of Chartered Surveyors, which foresees 8 per cent price increases across the country in 2014.
• How the capital’s housing market, though surging, does not appear to be out of control, since it seems to have solid foundations, making it better placed than many of its rival global cities.
Indeed, such has been the performance of the capital in recent years, supported by an ebullient property market, that experts believe it has made a major contribution to keeping the country afloat.
Yolande Barnes, the director of Savills World Research, said: “It is an extraordinary economy. If it hadn’t been for London, the UK would be like Portugal, Spain or Greece. There would have been no redeeming feature in our recession.
“These global cities are very powerful wealth generators. The city economies are much more important than national economies now.”
Such has been the extent of London’s contribution that she believes that about a third of Britain’s gross domestic product in recent years has been generated by the capital.
Though there have been fears of instability in the property market, experts agree that its soundness depends on whether the underlying structure is firm or whether it is being inflated by irresponsible lending.
The evidence is that the market is moving at a steady pace, at about 750,000 transactions a year compared with the highest of two million, recorded in 1989 before the crash of the early Nineties. A surprisingly high proportion, 35 per cent, are paid for with cash and no borrowing at all.
With economic forecasts being revised upwards, there is enhanced confidence in the stability of that market.
Lucian Cook, head of Savills Residential Research, said: “The figures suggest we are at the beginning of a period of more sustained house price growth.”
He said that 2013 had seen a more significant upturn in the market than had been expected. Last year, Savills forecast that mainstream prices would advance by just 0.5 per cent. Others expected falls. In the end, average prices are likely to end the year up by between six and seven per cent.
However, he added: “There is still a lot of conflicting evidence as we have first-time buyers still very suppressed, trapped second-home movers, and the elderly holding most of the equity.”
Those concerns remain. Shortage of supply pushes up prices, and builders insist that if more houses can be built it will ease the pain.
Already 30 per cent more are being started this month compared with this time last year, so a start has been made. Fears that the bubble would be inflated by the Government’s Help to Buy scheme, which assists people struggling to get a deposit on their first property, do not appear to have been justified.
Savills believes the scheme will add no more than 12 per cent to the numbers stepping up to buy. “This does not represent a housing market bubble,” Mr Cook said. More people will stay within the private rented sector and the market should move forward at a sedate pace.
Indeed, the scheme, along with Funding for Lending, does seem to have helped increase confidence.
These underlying factors, combined with London’s appeal as a world financial centre, have made Britain a safer place in which to invest in high-end property than many other countries.
The capital has already proved itself by weathering the economic crisis better than anyone could have hoped. The average price of a property is now £452,400, and in the most expensive enclaves of central London, prices have risen to 27 per cent higher than they were before the downturn.
Huge sums have poured in from international buyers purchasing heavily in Knightsbridge and Kensington, possibly as much as £37 billion since 2006.
With low interest rates and poor investment returns in the Western hemisphere, London has served as a desirable haven in which to park money.
It is precisely this influx that has prompted much of the concern about the unsustainability of the bubble. But the data shows that price rises in the blue-chip areas of the capital have slowed, with Prime Central London’s monthly growth less than one per cent for the last 18 months.
The data also indicates that what is seen as the foreign takeover of high-end property is not quite as extensive as is perceived. International buyers own just over a third (39 per cent) of the property, and surveys show that 85 per cent live and work in the capital, contributing to its economic success.
Despite the price of a one-bedroom flat in central London having gone up by £60,000 in one year, the capital’s market appears steady in comparison with other countries.
The international estate agent Knight Frank’s Prime Global Cities Index, which monitors prime property values in 27 cities across the world, shows that London sits in 10th place with a rise of seven per cent in the past year.
Far greater booms have occurred in Asian centres such as Jakarta (27.2 per cent in the past year), Dubai (21.8 per cent), Beijing (16 per cent), Tokyo (13 per cent) and Shanghai (12 per cent). Western rivals such as New York (11.1 per cent), San Francisco (10.9 per cent) and Sydney (8.4 per cent) have also seen bigger rises.
Further down the list are markets that are suffering. In Mumbai, where the economy is struggling, prices are stagnating after a period of big rises. Many European cities which compete for international business and residents, such as Monaco, Geneva and Zurich, are also faring less well. Monaco saw a rise of just 3.2 per cent, while Zurich and Geneva − 23rd and 24th on the list − saw prime property values fall by 2.1 per cent and 2.8 per cent.
In the year ahead, Knight Frank predicts that Dubai will see the largest increases of between 10 and 15 per cent in luxury property, while Beijing, Shanghai, Sydney and Paris can look forward to 5 to 10 per cent, and Hong Kong will see the largest drop of 5 to 10 per cent. London is expected to rise by a steady 5 per cent.
One reason for London’s steady position could be the cost of living, or balance between inflation and stagflation − an indicator of health in the market. In this respect London is, helpfully, nowhere near the top of the global charts.
In Knight Frank’s Global Lifestyle Review, which bases the cost of living on more than 200 goods and services, it ranks as only the 14th most expensive place to live, behind Monaco, Madrid and Munich. The same survey puts London eighth for quality of life, ahead of all those European rivals.
Yet house prices remain extremely high. Savills’ league table of the most expensive asking prices around the world puts London in second place after Hong Kong.
The table, used to illustrate trends around the globe, is based on a far from straightforward analysis of a group of seven people in a notional company, with differing income levels and housing needs and is compiled to help when firms are considering relocating.
Even so, the property squeeze here is still not as acute as in some parts of the world. Yolande Barnes, from Savills World Research, said: “I hate to think what Londoners would say if they lived in Tokyo. They would be spending the same amount but living in half the space.”
There have also been positive results from the central London property boom. It has led to the regeneration of previously unfashionable areas such as Hackney, Peckham, Deptford and Brixton as buyers have sought affordability and brought new wealth to these places, too.
In Hackney prices are up by 31 per cent on average since 2007 and in some areas, such as north of Stoke Newington Common, young professionals now make up 25 per cent of the population.
Brixton has been taken over by buyers who can no longer afford Clapham, and estate agents say some prices have risen by 25 per cent in a year.
The prevailing view has been that this is a bubble affecting only London and a few select areas of the South East, while other areas of the country languish. But there are clues that this is not necessarily the case.
According to the Land Registry, 70 per cent of counties, unitary authorities and boroughs in England and Wales are seeing positive annual growth, up from 50 per cent in 2012.
The focus in 2014 is predicted to swing further from the capital to the country, where the best houses are still priced at about 15 to 25 per cent below 2007 levels.
Londoners will take advantage of the price differential and make the move. Analysis suggests that the residents of areas such as Clapham, Wandsworth and Crouch End will take their property capital along the railways into the commuter belt.
Already, agents who sell town and country houses are feeling the glow. Michael Fiddes, head of estate agency at Strutt & Parker, said: “The gap in property values between London and the country has become so great that we have started to see people take advantage of that. So you can sell a two-bedroom flat in Pimlico for £700,000 and buy a five-bedroom farmhouse in Suffolk.
“The differential is the greatest it has ever been in 30 years.”
Sophie Chick of Savills Residential Research said: “There is little doubt that the ripple effect from London is long overdue, having taken longer than usual to breach the boundaries of the M25. Prices in other parts of the UK will start to outperform London at some point over the next five years.”