London’s property market is heading for a fall

One of the biggest downsides of living in London is the property prices.

Unlike much of the rest of the UK, house prices in London have shot up to surpass their pre-2008 peaks.

This started in the “super-prime” areas of central and west London. But it quickly spread out to the rest of the capital as those priced out of those areas moved to less fashionable places.

One recent example of how ludicrous things are getting is the block of flats in Brixton that are on the market for £465,000 each, despite the fact that some of them haven’t got any windows.

According to the Land Registry, average prices for Greater London have shot up by more than 40% in the last three years alone. The Nationwide puts it even higher, with adjusted prices increasing by over half from 2012 to 2015.

However, the good news is that this process may be about to go into reverse…

The foreign money is drying up

One of the things that has driven the London market higher, apart from ultra-low interest rates, is the influx of foreign cash. Sky-high commodity prices meant that large amounts of money flowed into the Persian Gulf and Russia. Because those regions aren’t exactly the most stable parts of the world right now, many of the super-rich scrambled around for a safe-haven, and found it in London prime property. Similarly, many wealthy investors in the eurozone also saw UK property as a safe haven.

This process was accelerated by Britain’s generous tax system – the ability to buy property through overseas companies allowed foreign investors to avoid most taxes. In the six years to 2015, £100bn worth of property was bought by foreign investors in this manner.

However, all of these ‘positives’ for the London market are unwinding. Falling commodity prices have slashed the amount of money flowing into the Gulf states. The eurozone seems to be slowly recovering, although another crisis can’t be ruled out.

And most significantly, George Osborne is moving to tax high-end property much harder, imposing additional taxes on purchases through companies, for example.

But it’s not just on the demand side. High prices are doing what you’d expect them to do – helping to boost supply. As the FT recently noted, more than 50,000 apartments in the £1m-plus target market are either being built or are in the pipeline. This is despite the fact that less than 4,000 such flats were sold in 2014, generally considered to have been a very good year for the London property market.

Such a mismatch between supply and demand is starting to have an effect on prices. One high-end estate agent has seen transactions plunge by nearly two-thirds.

Not only are sales down, but those prime houses and flats that are selling, are selling for less. Estate agent Knight Frank believes that asking prices have fallen by as much as 7% in areas such as Knightsbridge over the past year. What’s more, prime buyers are starting to ask for substantial discounts.

There’s more pain ahead for property

As well as the drop in foreign owners, demand is set to be hit further by measures to curb buy-to-let investing. Osborne has already changed the rules to make the tax treatment of mortgage interest far less favourable than it was. And from April, a stamp duty surcharge of 3% will be applied to all second homes, including buy-to-let properties.

These changes will make it harder for landlords with mortgages to cover their expenses, particularly if interest rates ever think of rising again. The Bank of England is also discouraging banks from lending to landlords, by increasing the amount of capital they have to hold against such loans.

Overall, it is clear the government thinks that the sector creates more problems than it solves and wants to cut it down substantially from its current size.

Obviously, calling the top of any bubble is difficult, and London property is no exception. But all bubbles eventually have to pop and when this one does, prices could end up falling substantially.

According to the Nationwide’s data, average London prices are 10.1 times the salary of the typical first-time buyer, compared with an average of 5.1 times since 1983. Even taking into account the much lower interest rates, this means that first-time buyers pay an average of 66.3% of their monthly income on mortgage payments, compared with 50.3% over the same period.

That can’t be sustained – and so it won’t be.

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  • Aztec

    Yes I think we have read this before in Money Week and guess what prices continue to rise. The fact is that there are few places to put money while yields are so low at the bank. Add to this the prospect of another banking crisis and people feel that London property is a reasonable investment even if it goes down 20% you have 80% of your money left. Ask the poor souls who had deposits in the Bank of Cyprus everything over Euros 100,000 was lost. Gold and property are tangible, currency is paper.

    • PKP

      I have to reluctantly agree. As someone who was brought up believing that paying off your mortgage and getting out of debt was the most important financial aim, I’ve been watching with amazement how property prices have just gone out of control over the past decade. After the bubble burst, it just appears to me that people lost interest in the stock markets and buy to let became the new must have investment – at any price! It’s now at a point, where I think it’s just too late to bring it back under control. If prices have been driven by investment decisions (rather than a place to live), where else can people go to park their cash – Stock markets, Cash, Bonds, Art, Wine, Gold? None are as appealing. The only way the ‘big crash’ will ever come, is if people find another destination to buy properties to challenge London’s attractions from an investment point of view.

      • John Spindler

        There will be other speculative bubbles in the future its in the nature of people……what ends them all is when they reach dizzying heights and they retread at light speed the heights they climbed to….then the carnage of those who had geared to join the party…adds to the negative sentiment….the 90’s is a perfect example property as an investment was toxic for 9 years ! People had fallen out of love because they had either got burnt…seen others burnt….saw what the new prices were for their beloved house fro the lips of the EA….they became just houses again…..and this time welll…..I’m 50….probably be in the doldrums for 2 decades….and those with big mortgages will be bankrupt or hanging on in tears… borrowing is like trading shares on margin…magnifies your gains but equally your losses….we have recourse mortgages(that no body seems to understand in the UK) all in the banks favour… cannot sell when in neg equity without lenders permission and you will then be liable for the shortfall…..repossesed/hand back the keys ? still on the hook for the negative amount…..people in the uk are stupid when it comes to property…thye donlt understand finance and economics….they don’t really understand how we got here and they sure as heck wont understand when they get flushed back to the 90;s……this bubble is enormous and if they stretch it even more might get a bit bigger but the end result will be the same……

        • GSL

          I agree.. but when and how? the failure of the banking system wasn’t enough. Most of the market seems propped up with taxpayers money (zirp, h2b et al) and the UK economy has been tanking (falling wages for almost a decade)… when and how will it end? the state can simply pump in more cash. h2b London is now 40% of the purchase price.

    • John Spindler

      Your facts are wrong it was not 100 percent confiscation over 100k….and you think because what they have been warning about hasn’t yet happened is some really weird logic…..this is a speculative bubble and it s just a matter of when not IF…When….dress it up how you like….demand…wrong its credit and sentiment…..when these 2 turn the other way POP ! People will look back and shake their heads(again) how they thought ot would go up and up and up….research eire….holland,,,,,spain and cyprus……

      • GSL

        Japan… research Japan… prices are 90% down in prime Tokyo from the 1990 prices…

  • Horiboyable .

    Flooding the world with the default currency since about 2001 has been a disaster. Globally we have entered a deflationary cycle which has already begun. This will make 2008 look like a minor bump in the road. What will it look like, well house prices heading down to year 2000 prices, multiple bank failures, sovereign bond defaults. This will be so severe that there will be much civil unrest and the possibility of war.
    Note the trend in politics in Europe & USA, how these 3rd parties or outsiders come from nowhere and get into power. This is dangerous but then people have had enough of their earnings going towards bailing out banks and politicians fraudulent expenses. This process is just starting and we will have another 2011 on our hands all over the country. The Euro is done and so is the EU project, the cracks are so glaringly obvious you have to be blind not to see them. Its possible that most EU nations will default on their bonds like they all did back in 1932.

    • Pob

      I wish.

  • Big V

    I agree house prices are too high down here and at some stage they will come down. But a few overly optimistic developers having to reduce their prices from 1m to 900k is not going to bring the house down. If your neighbours house sold for 500, you almost always try to market yours at 550 (particularly in a bull market)

    I think the market will plateau soon – but a crash will only be caused by external factors (bond market blowing up, stocks going into free fall, a banking crisis, major inflation/deflation etc)

    • Peter

      Sterling crisis on the cards if we Brexit

  • A Frith

    I wouldn’t normally expect a crash so soon after the last one, but….
    The rest of the UK has not recovered at all, prices are the same, or lower, than in 2007. No crash is due elsewhere. London, as they say, is a special case.
    House prices in London could halve without reaching the national average.
    A few rich foreigners should not be able to move the market for millions of ordinary homes. I suspect that the banks have once again blown an enormous bubble with irrational valuations of assets. I sense a Minsky moment approaching.
    Even a stopped clock is right twice a day, and Moneyweek’s time may have come.

    • FromFrais

      “The rest of the UK has not recovered at all, prices are the same, or lower, than in 2007”

      I live in Norwich 2 hours from London, nice place but hardly a economic powerhouse.

      2011 bid on a property 300,000 NR2 Christchurch Road (was 335,000) vendor removed from market…Same properties now going SSTC for 480,000+ 40% in 4 odd years.

      I don’t disagree with you but you have to admit the bubble in London has dramatically inflated any location either linked to it or where a Londoner may choose to move.

      • A Frith

        Yes, I do agree. Perhaps we ought to see London as the epicentre of a disastrous bubble, not a contained disaster.

    • John Spindler

      on the train to waterloo yesterday looking at all those laughable “leasehold flats being built(i hate leasehold with a’s faux property ownership the only real bit being the mortgage)…..on the southbank….its the emperors new clothes 1/2/3 million ad you don’t even own your own walls…..its total and utter madness…..but you know what..?..they are the hubris on top of the hubris that is the uk property market and they will…actually looks like already going to be the blue touch paper that blows the fantasy apart in spectacular fashion…..stand well back…….if you have ever had to look at selling when the market has turned bear you will know what i mean….hearing the words and numbers from an EA you don’t want to hear…..the length of time it takes to sell property all adds to the pain…if you can sell it at all……it is life destroying…..buying property and looking at your paper gains is fools gold one moment youre rich the next broke… a house and get out of debt fine asap….but it;s not about buying houses the houses(or flats) are just a vehicle that the mass hysteria is using this time and it always end the same….no amount of talk of demand blah blah or its different this time…….The Amsterdam stock exchange once many moons ago traded Tulip Bulb futures////it’s sounds incredible but that ladies and gentlemen is the madness of crowds…its different this time…except it never is !

      • A Frith

        Yes, and when one considers that the crash that Japan experienced a generation ago, and from which it is still struggling to recover, was triggered by a crash in property and land values that came close to destroying it’s financial system.
        Japan was at the time considered to be potentially the most powerful economy in the world. Britain is not immune.

  • Andy

    No Chance. Interest Rates about to turn negative. 0% return is better than a tax on savings. Until rental prices = mortgage costs, prices will rise. With interest rates lowering, mortgage rates lowering and rents rising, prices can and will only rise. The signal to watch for is rental drops.

    • A Frith

      Why would anyone think 0% return in the property market is better than 5% return in one of the older stock market funds?It seems illogical.
      I don’t think rental drops are a strong signal, you will see them after the event not before. You might look for houses taking longer to let?

  • Pro-EU

    Finally something we agree on

  • peter

    The housing market has crashed before, around 1980, 1990 and most recently 2007. So I would not say that the market always goes up.
    It is hard to know whether the risk factors mentioned in the article are enough to push the market over the edge, but it sure is not helping.

    • John Spindler

      2007 wasn’t really the crash it should have been……so now we have a bubble on a bubble….its clear to me now Osborne has wanted to stoke a boom to win votes and create an illusion…but he doesnt really understand the dangers because for him personally he’s a rich boy if he has a mortgage its the taxpayer paying it….and he could pay oi off in a heartbeat if he wished…..he will have moved on he figures when the shtf….and the attack on btl may be a attempt to delay the inevitable and ironically win votes from the young because they are seething and they will soon have more clout than the boomers and my will they punish the tories….the uk is heading for disaster brexit or no brexit…..brexit may just be a convenient excuse..

      • Peter

        They blame poor high street spending on the weather / world cup / olympics so you’d probably need to factor in some more spurious excuses before any acknowledgment of a real problem.

  • AAJ

    “shot up by more than 40% in the last three years”

    The thing is, yes prices will drop at some point, but just how much will they unwind? Probably not by much. Presently it’s marching on 5% annually. So, even a 20% correction in 2 year’s time won’t unwind much of the massive price increases we have seen.

    There is just too much pressure on housing stock. People are literally dieing to get to the UK and to London. Prices are not going to get back to 5.1 average earnings, ever. That dream has gone, you need to move past it.

  • soysauce1

    A surprisingly good article, central London prices have been falling for 18 months not that you would know unless in the industry, journalists get their info from Estate Agents who always talk the market up, when Wandsworth Council announces they have agreed to take 372 flats for social rent and 154 to buy in the most prestigious development around… Battersea power station you know real trouble is brewing Studio flats were being sold off plan for £800k double the price of studios in prime parts of Battersea the developer must be in shed loads of trouble inviting Wayne and Waynetta Slob to live in their shiny new development same goes for Battersea Reach where unbeknown to the world over 60% of the flats are on the market from off plan buyers… about 600 units, rentals are very poor at the moment with flats being left empty for 3-4 months at a time…if you can then time to sell, take the “low” offer you think it is and get out, let the sucker who buys it take the shed load of pain on its way, that low offer will look pretty damn good next year…

  • Peter

    Do people who face repossession deserve sympathy and a bailout?

  • Paul Charles


  • Line UP

    this is what happen when you allow banks and insurances to buy property when before they were not allowed

  • Paul Charles

    who keeps deleting my posts…and why??

  • Paul Charles

    Paul Charles

    an hour ago

    Thanks, we’ll work on getting this corrected.
    available for 5K in Glasgow. Only those desirous of buying properties
    in and around London are complaining about prices. Attacking landlords
    will negatively affect quality, quantity and value of rental
    accommodation. Even a slight dip in prices will further incentivise the
    already increasingly incentivised to buy property in anticipation of the
    eventual and inevitable price rebound. As asylum seekers, uk graduates,
    wealthy foreigners continue to beat an ever-more-congested path to
    London prices in London will continue to rise. Where would YOU rather
    store your money…in London property or a bank? Exactly, the same as
    anyone else. London is its own animal, a unique beast, a property law
    unto itself, it laughs in the face of doom-mongers, it continues to
    adorn itself and reinvent itself as it leads and sets. The most reliable
    and valuable asset one can have in the uk today is the ownership of
    London property. Personnel may change, nationalities may change, but
    London property is no respecter of persons, it surrenders to the highest
    bidders. Not even bank accounts can compare to the security of the
    freehold ownership of a London property, ask any mortgage-broker. In an
    increasingly insecure world, the most secure asset only increases in
    allure. Beat a path to Glasgow…then gradually move southward as you
    can afford. Homes will never go out of fashion!!

    • A Frith

      London is a dreadful place to live. It is dirty, noisy and madly overdeveloped. Commuting is a nightmare. It’s only attraction is it’s economic activity that hands a job to anybody who is willing to accept it’s appalling quality of life.
      Unlike many world capitals it permits non citizens to buy homes, it even permits them to live elsewhere. This is by no means the norm worldwide.
      The English, for whom it is their capital city, are withdrawing at a rate of knots. It’s public services are collapsing and it’s infrastructure crumbling. It is being overwhelmed by desperately poor immigrants who live in conditions the British would consider intolerable.
      It is scarcely surprising that those who can, leave.

      • Paul Charles

        I was born and raised in London and felt I was in Heaven. Obviously you feel differently, different strokes etc. London has myriads of parks, markets, shops, educational establishments, types of people, theatres, events, mucic venues, rivers and canals, museums, sports clubs/events, galleries, as well as friends, family, colleagues, clubmates, etc. If you don’t like any of these things you’d find it hellish! The infrastructure is being ugraded, crossrails 1 and 2, proposed pedestrianisations, new buildings going up everywhere one looks. English are withdrawing but keeping ownership of their London properties (wisely). London has long been cosmopolitan, and all the richer for it. Poor immigrants ae pouring in (twas ever thus) like most cities on the planet, including within the uk. There is no place like London, it is like a stunning girlfriend who is a litte crazy, you feel like throttling her or ditching her at times, but she is such a turn-on she will find another guy in a split second and you will be hard pushed to find another girl that turns you on and thrills you to anything like a comparable degree!

        • David Johnston

          You make some good points Paul but the rightmove post is misleading. I come from the West of Scotland and the flat you show is in Dumbarton and going to auction where it will go for 6 to 10 times more than 5k.

          • Paul Charles

            Not so. I recently bought three flats in the West of Scotland from Auctions, all at below the reserve price, all for circa 30K. Also I attended an Auction in Glasgow last month and several properties failed to sell, even at very low prices. Even now I can see loads of properties for sale under 50K, uncluding acceptable 2 bed properties.

  • Rich

    Some valid point, but…its in MoneyWeeks interest to steer subscribers to their ISA, Pension and Share broker sponsors such as Hargreaves Landsdowne.

  • Nathan Ball

    The figures at the end of the article assume it is a single person, most people have more than one person contributing to the mortgage so it is in fact 5x income and or 33% of household income or less more than likely which is more sustainable.