For all the talk of people deserting London and moving to rural areas, house prices in the capital continued to impress throughout 2020. London’s property market saw an overall growth of 9.7 per cent, with specific property types performing particularly well to help the overall figures.
If London prices can see an uptick during a worldwide pandemic, what happens once life resumes some form of normality? According to Zoopla, the average London house price value is around £645k, with the average price paid just shy of £700,000.
These prices are even more impressive when you consider inflation only rose by 0.8 per cent. However, with the current average London wage sitting at £37k, the question is: are house price increases sustainable in the long run?
The economic outlook in London and the rest of the UK is a precarious one, even with a roadmap in place detailing our escape from Lockdown. The economy began the year on the backfoot with a nationwide lockdown, and we’re now in the country’s worst recession in 300 years.
The financial landscape isn’t set to return to pre-Covid levels until late 2022, and the 2021 growth rate is expected to float around the 4.3 per cent mark. The UK is behind every other major economy, with the exception of Argentina.
All this before we even get to Brexit, which is likely to set economic forecasts back in the short term as companies adapt to new rules and regulations. Therefore, it’s reasonable to expect more economic volatility as companies, and people’s wages feel the pinch.
What does economic strain mean for the property market?
As London house prices rise, wages have only seen incremental gains. There is a huge disparity between what the average Londoner earns and the average house price in the capital, and that will continue to cause problems for those trying to get on the property ladder.
Someone earning an average wage of £37k can expect to borrow a mortgage of around £150,000. While a two-person house income of £74k can possibly double that amount. That would mean a deposit of £344k to buy a house if you use London’s average price range of £644k.
There are help-to-buy schemes and shared ownership options, which go some way to supplementing the massive difference. But the stark reality is that it’s never been so hard to buy a London property, especially with the Covid situation rearing its head in the background.
Where are London property buyers coming from?
As far as the London property scene goes, the only way is up. Despite economic strains, the housing market continues to perform well. Pent-up demand, the stamp duty holiday, low borrowing costs and overseas investors have all contributed to the mini-boom.
And it’s savvy investors who are leading the capital’s resurgence in the property market. This is reflected by the growth of property prices in inner London (investment hotspots) compared to outer London. The borough of Kensington & Chelsea, for example, saw a vast 28 per cent increase last year.
The overseas market has also had a ripple effect on the capital, especially from buyers in Hong Kong, who have looked to London homes in the aftermath of China’s clampdown on the city state. London’s high proportion of properties bought for investment from cash buyers and overseas has certainly played its role in boosting the market in the capital.
The impact on non-investors
Rising house values pricing out domestic buyers who want to get on the property ladder isn’t a new trend in London. However, the current climate (as a result of Covid) has turbocharged the disparity, which leaves most people looking towards the rental market.
Renting is on the rise across the whole of the UK, and it’s expected to make up 60 per cent of the London housing market by 2025. Some people opt to rent as a lifestyle choice, appreciating they can live in a rented home that they wouldn’t necessarily be able to buy. However, others rent because they know that getting on the housing market is a fading dream.
And while it may be a vicious circle, it offers savvy investors an opportunity to provide excellent-quality housing to those looking to rent.
Renting in London
Annual rents in London saw the lowest growth rate in the whole of the UK during January 2021, with an increase of just 0.8 per cent. On the face of it, those numbers might not appeal to investors and developers. But with overall sale prices increasing so much, there is a positive outlook for all involved.
Rental figures are steady yet affordable with solid yields, while investors continue seeing their asset appreciate in capital growth. Inflation is predicted to grow by two per cent in 2022, as demand for rental homes continues to pick up the pace.
Property owners in the rental market are seeing long-term gains and short-term returns. With such a high demand for rental accommodation, the sustainability outlook is positive for investors. And even with the wobbles of Covid and Brexit, the overall picture is a positive one.
London’s property has not only kept its value but seen an increase. It should be the boost that investors needed after an uncertain 2020. With the UK aiming to get back to normality by mid-2021, there’s every reason to believe the second half of the year and beyond will see the London property scene grow from strength to strength, both in the rental and sales market.