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OPINION

London housing boom and bust may be amplified

London housing boom and bust may be amplified
September 2, 2020
London housing boom and bust may be amplified

But a looming rise in unemployment has sparked concerns that the surge in buying will subside – and a recovery in activity may be tougher for the London market. 

Even if the prolonged exodus from the capital does not materialise in the face of a long-term boom in home-working, the London market has some unique challenges. Affordability is chief among them, which hinders the ability of first-time buyers to get onto the housing ladder, but could also limit any rises in sales prices. By the end of last year it would take the average earner 15 years to save for a 20 per cent deposit to buy the typical first-time buyer property, assuming they set aside 15 per cent of their take-home pay each month. That compared with five years in the north and seven years in the West Midlands. 

The ratio of earnings to the price of a home purchased by first-time buyers versus average wages has declined from its post-financial crisis peak, according to data from the Nationwide building society, but it still stood at a multiple of 8.9 during the second quarter. That compared with the next most expensive region, the south-east, at a ratio of 5.8.  

Admittedly, the increase in the stamp duty threshold to £500,000,will provide more of a benefit to those buying in London and the south-east than regions with lower average sales prices. However, the stamp duty holiday is slated to come to an end on 31 March 2021, when a greater proportion of homebuyers will be caught by the tax and have to pay a higher level of stamp duty. 

Other factors such as Brexit and the attractiveness to international buyers are also material in ways that they are not in other regions of the UK. On the latter front, agents have said that currency devaluation has made the market attractive to overseas buyers, but the lure of the market could wane once the surcharge on foreign tax residents buying homes in the UK commences on 1 April. 

London is also the only region where rents are forecast to decline over the next year as a reduction in tourism results in more holiday lets being put on the long-term rental market, according to the Royal Institution of Chartered Surveyors' latest survey. That seems likely to deter buy-to-let investment within the market and weaken demand further. 

The risk of a spike in unemployment and any knock-on increase in forced sellers is a threat to the health of regional housing markets across the country. But the potential for a bounce-back in activity would seem to be more challenged in the London market than elsewhere. The boom and bust feared by some over the coming months may be amplified in the capital’s housing market.