Vatche Cherchian, Portico’s Regional Director, gives us a thorough and interesting update on the London property market, from revealing what’s really going on with London house prices and transactional volumes, to highlighting up-and-coming property hotspots.
Average house prices in London and the rest of the UK
Feeling a little lost with so many house price indices and predictions in the media? Brexit is undoubtedly having a profound effect on our economy and housing market, but what’s really going on with house prices?
This graph compares average house prices in greater London with the rest of the UK. The red line is house prices in England and Wales; the blue line is house prices in greater London.
What we can see from the graph is that greater London average house prices have remained relatively flat over the last couple of years, contrary to a lot of the scare-mongering, Brexit or election-related media headlines.
The average house price in greater London now stands at £620,000.
On the other hand, if we look at England and Wales we can see that house prices have seen a slight increase, probably to the tune of about 3% or 4%. The average price is now hovering around £305,000 - £310,000. This is probably not a big shock to a lot of people. Large parts of England and Wales have been outperforming London for a while now in terms of house price growth, and still there’s room for further growth in many areas too.
Vatche Cherchian said: “But while house prices in London have remained relatively flat over the last couple of years, wage growth hasn’t. We’ve actually seen a 4% growth year-on-year in wages. And if you tally that wage growth increase up against flatlining London house prices, what you’re saying in real-terms is that it has become around 10% cheaper to buy a property, which is encouraging.”
London transactional volumes over the last 20 years
The next slide we’re going to look at shows transactional volumes in London over the last twenty years. We are starting at 1998-1999 on the left hand side and are comparing transactions across the years up to 2018-2019 on the right hand side.
Currently transaction levels in London are standing at around 90,000 a year, and have been at this level since 2017. When we compare this to the start of the financial crisis in 2007-2008, volume levels are slightly lower. But, it’s really encouraging to see we are still around 30% higher than the staggeringly low transactional levels in the depth of the crisis in 2008-2009, 10 years ago.
Note: Residential property transaction volumes or sales volumes are the number of houses being bought and sold.
Speaking on the matter, Cherchian said: “The current transactional volumes in London are encouraging. When we look at the market a decade ago, the financial crisis had an overnight impact; the banks stopped lending, there was an abundance of properties available but people couldn’t buy. Though the market has seen a gradual decline in transaction volumes over the last four years, it has certainly not been a dramatic drop. And property prices historically following volume decline, which is why we’ve seen a softening in London house prices rather than a big fall as many expected.”
Drilling down to specific boroughs: prime central London
Next let’s look at London boroughs. The following graphs compare Westminster on the left and Kensington and Chelsea on the left - the areas we notoriously class as prime central London. These boroughs are essentially the barometers or ‘trend-setters’ for the rest of London, and what happens in the property market here typically ripples out to the rest of the capital.
When we look at Westminster, we can see there has been a volume decline of around 23% from last year. In terms of house prices, Westminster prices have fallen by 8% year-on-year and Kensington and Chelsea prices have fallen 4%.
Cherchian commented, “While these boroughs typically act as barometers for the rest of the capital, we are actually seeing certain areas go against this declining trend.”
Volumes and house prices in east London
As a contrast, let’s now look at the east-London boroughs of Redbridge and Haringey. On average, transactional volumes have been pretty flat in Redbridge over the past year, but we have seen a 3% increase in the volume of transactions in Haringey which is encouraging. In terms of property price growth, Redbridge, again, has remained relatively flat, whereas Haringey has seen a nominal 1% increase. This is a good example of how boroughs across London can perform completely differently and why it’s so important to research location, volumes and house price trends before investing.
Supply versus demand economics
Next we have a very simple slide to explain supply versus demand.
In 2018 we saw a 3% increase in sales stock listed on the market. In the same year we also saw the volume of transactions reduce by 6%. Effectively, this meant that in 2018 the volume of transactions remained exactly the same.
In the current 2019 market, sales stock is down 24% year-on-year but the volume of transactions increased by 6%. What this means is that there’s far less properties currently available to purchase, but a higher percentage of those properties are being transacted on. In other words, there is some movement in the market! This is encouraging as we move toward 2020, and again, a reason why we haven’t seen and don’t expect property prices to crash.
Interestingly, when we look at the rental market it’s a different story. Rental stock is down massively in London year-on-year, probably to the tune of about 25-30%. This is due to a couple of factors:
- We’re seeing less new landlords enter the market (and landlords sell up) due to tougher legislative and tax changes
- More tenants are renewing their tenancies than ever before
Together these factors equate to less properties on the market for rent. And a huge surplus of demand from tenants but a low supply of stock is the reason why rental prices have been increasing over the past year.
What does this mean for rental yields in London?
We’re going to take a quick trip down memory lane to 2017, where the average rental yield stood at a low 3.6%.
The dark grey colour on our yield map signifies the London boroughs that were achieving less than 3.5% rental yields. The only borough in yellow achieving between a 4-5% yield in 2017 was east-London’s Barking and Dagenham.
Fast forward to 2018 and it’s a very different picture:
The majority of London boroughs are now yellow, achieving average yields of 4-5%, and very few are still dark grey, falling into the bracket of offering less than 3.5% rental yields.
We’ve also seen a few boroughs turn pink, meaning they’re now achieving very healthy average rental yields of between 5-6%. In this time, rental prices are holding firm but property prices are slightly declining, hence why we’re seeing an increase in rental yields. The average London rental yield in 2018 was 4.2%.
Fast forward again to 2019, now you will see only two dark grey boroughs achieving sub 3.5% rental yields - expensive Westminster and Kensington and Chelsea.
All the other London boroughs either fall into yellow (4-5% average rental yields) or pink (5-6% average rental yields). The average yield in the capital at the moment is 4.5%, a big jump from 3.6% a couple of years ago.
Final words and hotspot forecasts
Last year we pinpointed Croydon and East Ham as London hotspots for landlords, and today both areas generating good yields for landlords of 4.7% and 5.5% respectively.
So, what areas are we looking at for 2020 and beyond?
As our slide shows we’re predicting a 5% yield in west London’s Hounslow, which is an increasingly attractive area for landlords. The average property price here is just over half a million, but there are still plenty of properties that fall under the £300,000 mark.
And you could very easily get a two-bedroom flat with outside space and a parking space for that price. Of course Hounslow is the London borough under the flight path for Heathrow's two runways, hence the ‘affordable’ property prices, but this also makes it well connected for those who travel often.
The area is also undergoing complete regeneration, with a half million pound revamp of the Civic Centre and Lampton Road, plus gentrification of the high streets too.Our second hotspot recommendation for landlords is Ilford in east London. Here you can expect a high 5.5% yield though property prices are lower too, standing at an average of £441,000.
One of the key things with Ilford is the introduction of Crossrail, which will make transporting into the city quick and easy and spur further gentrification of the area.Why not try our interactive rental yield map for yourself? The data is live and updated daily, and you’ll be able to drill down into specific boroughs to find the highest yields and best performing streets. You can also get an up-to-date sales or rental valuation in just 60 seconds through clicking here, or if you’d like one of our experienced Managers to pop over, give us a call on 0207 099 4000.!