Sales and pricing Conclusion
Superficially, the housing market looks as though it’s on the road to recovery. Construction starts in the inner boroughs were up by 42% from last year, with sales in the sector up by 71%. The planning pipeline in the inner boroughs looked equally robust, with a slew of recent permissions for high-rise developments in the pipeline. The market may appear robust on the surface, but
a look behind the headline figures reveals that it is anything but. The increases in consents, starts and sales witnessed
in 2012 were exceptional. We have not seen the like in all the 15 years that we have been monitoring the market. Consider that the level of construction starts in the inner boroughs is now higher than the pre-Lehman
average; consider also that in the outer boroughs that level is 22% down on the pre-crash norm. In an inherently conservative market such fluctuations are a genuine cause for concern. As we have alluded to previously, we believe that we are witnessing the start of a fundamental shift in focus by developers from owner-occupiers to investors, and this shift is already distorting the market. Figure 6 from the CML clearly shows that the number of first-time buyers has far from returned to the norm, a situation we cannot see significantly improving until better LTV and LTI values begin to appear, and yet, as stated, the level of construction starts is up in the inner boroughs.
Figure 6: Number of loans advanced to first-time buyers in London 2007-2012
Source: CML regulated mortgage survey
Ironically, it is the worsening economic conditions overseas which are fuelling the market, rather than any significant upsurge in owner-occupier activity. According to the Financial Times, foreign investment in top-end London residential property increased by 98% in 2012 compared to the same period in 2011. This increasing share of the market being taken up by foreign investors, predominantly as a means of wealth protection rather than wealth generation, has many ramifications. Traditionally, super-prime property has always been driven by equity and, as such, has been part of the historic residential landscape of the capital. Even here, however, there are voices of concern, as Grosvenor chief executive Mark Preston told Reuters recently: “The extremely high rate of growth over the last two to three years is a thing I’m concerned about and I think it’s probably unsustainable. We’re reaching values in prime London that are just extremely high by historic standards.” The increase in values in the super-prime areas is
due to both increased demand and ever-diminishing stock. What we are seeing now is investor activity expanding outward from that super-prime core to the prime and fringe prime locations. Map 2, we saw earlier,
not only neatly defines that fringe boundary, but clearly shows that developers are responding to that demand. However, if demand increases to such an extent that
investors venture in numbers beyond that boundary into traditional owner-occupier territory, then prices could well be pushed up across the board. Furthermore, if owner-occupiers are priced out of the market, this could lead to increased demand for rented stock which, in turn, could push prices in that sector up as well. This has all the hallmarks of a bubble. A market underpinned by the potentially volatile and unpredictable growth driver of foreign investment is one which could burst very quickly. Factors which could initiate a slowdown of that investment are numerous. However, a market increasingly dominated by
investors is one that is driven by sentiment as much as anything else and, that being the case, the downgrading by Moody’s of the UK’s AAA-rated debt status and the recent GDP figures do not bode well for the future. The current boom in the residential market is, as has been quoted numerous times in the press, largely London-centric, based on the perception of the capital as a safe haven for foreign equity. The question we have to ask is: what happens if it ceases to be?
Find out more about EGi London Residential Research and how it can help your business: visit
www.estatesgazette.com/london-residential
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