The London housing market has outperformed the rest of the UK to an unprecedented extent over the past few years, with price growth since peak up by as much as 65% in central locations.
But Savills’ latest mainstream forecasts predict price growth of 15.3% for the capital over the next five years, sitting below the UK average and generally reflecting less capacity for further price rises.
However, average value growth masks significant local variations. Understanding the potential of specific areas of London will become an increasingly important consideration for those buying at auction, in addition to understanding the potential constraints on affordability from further price increases and mortgage rate shifts, as well as the outlook for the private rented sector.
A borough-by-borough review of house price growth across London by Savills has found that the pace of the best performers over the current cycle has begun to slow, with annual growth now faster in lower-value locations.
In the four highest-value boroughs, annual price growth to August averaged 0.6%, compared with 12.4% growth for the four lowest-value boroughs. Going forward, the five-year forecast for Westminster and Kensington & Chelsea, where average values range from £1m to £1.3m, is 15%. In comparison, lower-value outer suburbs, such as Havering, Bromley and Greenwich, where average values range from £290,000 to £400,000, are forecast growth of 17%. For auction buyers, these lower-value areas look to have the scope to provide the best capital value returns to 2020.
Two London boroughs in particular look primed for the best price growth over the next five years: Waltham Forest and Lewisham, where growth of 20% over the period is predicted. Both locations are becoming increasingly attractive to a wider socio-economic profile of buyers, exceeding London’s average price growth as a whole, but retaining capacity for further value increases than the likes of Hackney and Southwark, which have been outperforming for longer. We regularly auction property from both areas, with garages, terraced houses and flats typically all proving popular. Developers and owner-occupiers alike are looking outside traditional wealth locations, not only for better future price growth prospects, but also due to affordability constraints.
House price growth and mortgage rate shifts look poised to stretch affordability further, causing a greater number of buyers to prioritise good value for money and potential over well established residential locations. While affluent international buyers are likely to continue to be drawn to central London, domestic buyers located in, or considering purchasing in, areas such as Richmond, Wandsworth, Lambeth and Islington may now be pushing out their search to neighbouring boroughs and beyond in a bid to improve affordability. The auction room is a perfect place to capture this interest, as the properties we sell often also require some work, creating additional scope for value uplift.
In addition to mortgage affordability, deposit affordability is also a significant factor in shaping the future of the UK’s housing market. In London, first-time buyers typically require a deposit that is more than 120% of their annual income. This is creating a significant barrier to home ownership and contributing to the growing number of people living in private rented accommodation. Additionally, the social rented sector is coming under renewed pressure and looks set to reduce in size, suggesting the private rented sector will continue to grow. It remains the only option for those priced out of home ownership but not qualifying to live in the shrinking affordable housing sector.
This presents an ongoing opportunity for investors, especially as rental growth in the UK is forecast to be 16.5% in the five years to 2020 and 22.8% in London. This means that, although London may see smaller capital growth than other areas of the UK over the next five years, its rental growth is likely to continue to outperform, making it an attractive option for those looking for improving yields.
As the demand for the private rented sector increases, tenant demographics are also shifting, with an increasing number of 35-49-year-olds in the market. For landlords, this presents the opportunity to invest in stock that would suit family renters rather than young professionals. Houses and flats with three bedrooms or more and outside space will become increasingly sought after.
Chris Coleman-Smith is head of auctions at Savills
