People suffer from house price anxiety as values tipped to rise further

Sunday 17th November 2013

With property prices continuing to race ahead across parts of the UK, a growing number of people are wondering how they are ever going to be able to raise the funds needed to gain a foot on the housing ladder or upsize to a larger property.

The increasing dilemma becomes more acute in London, where residential property prices and rental vales are now at or near an all-time high depending on where exactly the house or flat is located, with the biggest affordability constraints being witnessed in Zones one and two.

According to Cluttons, ‘House Price Rise Anxiety’ is affecting tenants in the Home Counties as well as London’s Zones one and two with 35% of tenants surveyed worried about getting on the housing ladder before the first rung rises any further.

Consumer confidence is at a four year peak, fueling an upturn in consumer spending, but a London home will remain out of reach for many in the current generation of ‘reluctant renters’ who, on average, estimate that it will take nine years for them to be in a position to buy. 


For those who are buying now, a recent Cluttons’ survey of nearly 1,800 people has revealed that 35% of tenants actively seeking to purchase a home are doing so because they are anxious to pre-empt further price rises and 17% cited the Government’s Help to Buy policy as a factor in their decision to buy. 


This anxiety is consistent across the region, with no difference with those living within Zones one and two and those living in the Home Counties. Aligned with this, the major concerns expressed by tenants planning to buy were found to be overwhelmingly focused on affordability and cost. 


Residential sales market projections

Based on Cluttons forecasts (developed in conjunction with Experian), Greater London residential values are projected to have grown by just over 12% by the end of 2013, while values in prime Central London will end the year 11% higher. Even outside the capital, prices will have shown positive growth, ending the year 3% up.


This upturn has occurred in the absence of a corresponding growth in household incomes. Despite the evidence of robust economic growth in the UK, wage growth continues to lag well behind inflation for most households.  With income growth, even in the more buoyant London jobs market, falling well short of the growth seen in the residential market, home prices are moving further out of reach for many buyers, despite an upturn in new homes development in London over the last 12 months.  The pipeline will need to expand much further to approach the level needed to have a dampening impact on price growth.


Capital growth is expected to slow to 3-4% in prime Central London and Greater London respectively in 2014. Even in London, a rate of house price growth at more than twice the long run average is not sustainable over the long term and the market will inevitably correct to a level of affordable demand which falls closer in line with income growth. Over the coming months, we expect buyers in those areas that have seen the highest competition- led growth to take a value for money reality check before bidding prices get higher.  That said, there are locations in and around Central London that have not seen double digit uplifts, offering greater value for money and longer term potential, and therefore will see price rises well in excess of the 3-4% average forecast in 2014.


Over the medium term, interest rate concerns will arise should the recovery be faster than expected, although the impact is expected to be tempered by a cautious approach to rate rises by the Bank of England. There is also a potential threat to overseas demand should current tax proposals move forward. However, while overseas investors dominate the headlines, it is Londoners, living and working in the capital, who are the mainstay of the market. Under our central scenario, we forecast average annualised growth of close to 4% across London as a whole over the next five years.


Rental market projections

Following a busy summer and September, driven by student arrivals and new job starters, demand in London has dipped back with existing tenants opting to sit tight, with little incentive to move before Christmas, while also seeking to contain costs.


Cluttons’ evidence of tenant activity shows higher levels of sharing amongst individuals and indeed couples, as well as moves to cheaper locations within capital. Wapping, for example, has been a beneficiary of this trend with tenants moving to the area to secure larger, higher specification properties for the same rent they are paying for smaller properties elsewhere in Central London.


The pressure on rents is containing increases to RPI at best which is expected to translate to average rental growth of 2% to 3% for 2013. The stagnation in Central London rental levels seen over the last eighteen months will persist for a little while longer, as the RICS Lettings Market Survey is showing the gap between tenant demand and supply in London opening up further over the last quarter.


Looking further ahead, the expectations for the job market are more positive, with unemployment levels in the capital forecast to start to fall sharply in mid 2014, while disposable household incomes are expected to show positive growth from the end of this year (Experian).  Reflecting this more positive outlook for household finances, Cluttons forecast Central London rents will grow by 3.5% in 2014 and by an annualised average of just over 4% per annum to the end of 2017, slightly ahead of the expected growth in disposable income amongst London households over the same period.


Sue Foxley, Cluttons’ Research Director, comments:“While the rental market may be experiencing some degree of the annual Christmas slowdown, the residential sales sector doesn’t appear to be taking any notice of the approaching holiday season.


“It’s encouraging to be approaching the end of the year with greater buoyancy in the market but the pace of price growth in the residential market is pushing home ownership further out of reach for large numbers of those living and working in London. The pace of growth will inevitably slow, but with the spectre of rising interest rates over the medium term, life in the capital will remain a challenge.”     



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