Will London house prices and rents thrive or dive in 2015?

publication date: Jan 5, 2015
author/source: Kate Faulkner, Property Expert and Author of Which? Property Books

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Will London house prices and rents thrive or dive in 2015?

There are two schools of thoughts for the London market. Firstly, it will continue to thrive, and secondly, prices will fall.

Read - latest 32 London borough house price analysis

Whether they go up or down, the honest answers to these questions are:-

We have no idea for house prices, but rents more consistent
Up until September 2014, the property price market was pretty consistent, with changes we saw going into and out of the last recession in the 1990s. But since September, the market has changed. For the first time ever, the government is restricting lending to homeowners by giving more powers to the Bank of England.

Back in 2000, post the last recession, the opposite happened, mortgages were based on ‘affordability’ as opposed to the income we earn and in addition, lending of 100%-125% and a lack of proper valuations, meant prices could rise exponentially – well until they fell in 2007!

What’s more consistent though is rents. What we see in London is rents rising, hitting a peak and then falling back again – even in our wealthy capital. According to the latest stats from the Private Rental Index (ONS), rents rose by 1.5% year on year, for new and for existing lets.

The market isn’t one and their performance differs
The problem with the London market now is it’s made up of 32 London Boroughs which are performing very differently. There are prime markets such as Kensington and Chelsea, Camden, Hammersmith and Fulham where properties are regularly sold for over a £1 million, while other boroughs, such as Barking and Dagenham, Bexley and Newham, still sell properties for under £250,000, a quarter of the cost.

Read - latest 32 London borough house price analysis

From a rental perspective, prime markets are very volatile and can change from one month to the next. According to Knight Frank, rents rose for six months in a row last year, but it’s slow: 1.2% year on year. And for those hoping to make money, it’s only capital growth that will deliver as the rental yields are under 3%, so likely to be loss making income wise, unless you buy for cash.

In the more mainstream markets, rental growth ranges from a fall in rents, according to the Belvoir Lettings Index, through to a 2% increase (LSL), although Countrywide suggests rises may be as high as 10%.

We don’t know how the election will influence prices and rents
The news is going to be full of election promises about housing policies, then there will be lots of speculation about what impact this will have on rents and house prices. That’s a ‘nightmare’ scenario for any market, as it really damages people’s confidence, or worst still, makes people make snap decisions they may come to regret later.

A good example is when Stamp Duty for first time buyers was stopped for 12 months, then lots of people ‘rushed’ to buy in the March before the Stamp Duty was re-introduced, which resulted in them paying more in property prices than they saved in Stamp Duty, and caused themselves lots of stress in the meantime too, trying to ‘rush’ to buy.

But, we do know a lot depends on:-

What happens to wage growth 
A lack of wage growth is a serious economic problem currently. It’s stopping the tax revenues from increasing and it’s making it tough for people to afford rises in anything, be it rents, house prices, utility bills and in some cases, even keeping up with food costs.

This is especially the case when the rises are inflation busting ones we’ve seen for utility bills while wages are back to their 2001 levels – in real terms - Check out this great blog from the Guardian.

Without wage growth higher than inflation, rents can’t rise (they are tied to wages), and house prices will struggle to increase – hence why some forecasters, such as CEBR, think prices in London will fall in 2015, while in general, small rises of 3% or more are expected.

Read our regional market forecasts

Download our latest London prices

What happens to confidence?
If the economic ‘boom’ we are experiencing continues, then that may mean house prices continue to be driven forward and may even mean rents start rising with inflation as opposed to underperforming, reducing landlords' earnings.

But if the economy dips or the election really spooks people, or indeed as forecasts suggest, prices do fall, then we could end up with buyers holding off and ‘forcing’ property prices down anyway.

When will we know?
It’s likely that it’ll take until the end of March 2015 to really understand the impact of the changes and the potential market fears the election could cause people to hold off their decision making, which means we’ll have to wait until April when the data is released to have a good idea of what’s going to happen to the London market in 2015.

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