House-price growth in the southeast of England looks set to outpace London, as high prices push households out of the capital. London prices are expected to grow by 5.8% this year, compared to 8.4% in the southeast, according to the Centre for Economics & Business Research.
Central London houses continue to draw premium prices, which fall significantly the farther you go into the commuter belt. One study by estate agency Savills suggests that house prices fall by £3,000 for every minute spent on a train heading out of the capital. The average property price in inner London is £606,000, compared to £458,000 for houses within half an hour's train ride.
This trend has created new hotspots, such as West Horndon in Essex 32 minutes from Fenchurch Street station where prices have risen by 65% over the past five years; and Hassocks, 58 minutes from London Bridge, where prices are up 35% over five years. While Savills also expects London prices overall to rise by around 5% in 2016, this amounts to a slowdown. Last year they rose by 6.7%, and in 2014 by 10%.
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In the same week as the average UK house price topped £200,000 for the first time (according to data from Nationwide), the Bank of England's chief economist, Andy Haldane, warned that there is a limit to how much the central bank can do to influence the housing market. There are pulleys and levers that the Bank and the Treasury can use to "damp down demand a bit", Haldane told an Open University event this week. "But ultimately the solution to the problem lies in the supply side rather than constraining demand."
The Bank's Financial Policy Committee (FPC) has also weighed in, noting that property investment represents a significant and growing threat to stability. The FPC recently endorsed tighter lending criteria for buy-to-let mortgages, which will bolster Chancellor George Osborne's existing efforts to curb the buy-to-let market including last week's 3% stamp-duty hike on second homes.
Haldane noted the Bank's concern about specific "pockets" of the market, such as buy-to-let. However, he also sounded sanguine on the wider market: "people are still rather averse to taking on too much risk, including in the housing market", he said, adding that transactions are only half or two thirds what they were in 2007.
Residential property might have retained its appeal for now, but there are signs that the commercial property market could be turning sour. According to the Investment Association, investors pulled more money out of property funds in February than in any month since November 2008 almost £120m.
It was the second month in a row of withdrawals, and marks a distinct reversal in fortunes from December 2015, when £151m poured into property funds. Last year, property funds were among the bestselling assets on the markets. But in just over 12 months they have sunk to among the five worst-selling assets alongside fixed income and equities.
Low rental yields (as prices have been pushed higher) are making investors wary. Researcher Morningstar has already warned of lower future returns from commercial property, and suggests that "fund performance may no longer compensate for the illiquidity of the asset class", notes the Financial Times.
One such liquidity-related risk is that investors try to withdraw money en masse, forcing managers of open-ended investment funds to sell properties to raise cash for redemptions. As Hargreaves Lansdown's Danny Cox tells the Financial Times: "Managers are forced to buy and sell properties according to cash flow, not on market conditions." If you do want to invest in the sector, we'd stick with listed real-estate investment trusts, which aren't exposed to the same level of liquidity risk.
Natalie joined MoneyWeek in March 2015. Prior to that she worked as a reporter for The Lawyer, and a researcher/writer for legal careers publication the Chambers Student Guide.
She has an undergraduate degree in Politics with Media from the University of East Anglia, and a Master’s degree in International Conflict Studies from King’s College, London.
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