London’s slowdown is spreading

Average house prices in London fell by 0.6% in the past year, according to the latest house-price index from Nationwide. This doesn't sound like a particularly dramatic drop, but it is unusual in that average prices haven't fallen year-on-year in the capital for eight years, since the financial crisis. And for the first time since 2005, the capital was the worst-performing region in the country.

Generally, most talk of falling house prices in London has been skewed by price drops in the most expensive areas, with prices in the rest of the capital continuing to rise at a steady level. The latest numbers suggest, however, that while the luxury market is still distorting trends, it's now the other way around a small number of high-value transactions appear to be propping up an otherwise faltering market.

Prime central London (the boroughs of Westminster and Kensington & Chelsea) enjoyed something of a recovery in the three months to the end of September, with average prices up 8%, according to property investment company London Central Portfolio (LCP). This followed "two years of stagnation", as buyers had previously held back due to Brexit uncertainty and the increase in stamp duty levied on second homes.

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However, the increase in average prices in prime central London can largely be explained by a greater proportion of high-value properties being sold, with buyers taking advantage of lower prices at the luxury end of the market, rather than any significant underlying growth, suggests LCP. For example, last quarter saw the most expensive sale ever carried out through the Land Registry £90m for a flat in Knightsbridge.

By contrast, the cheaper (in relative terms) end of the London market did less well, with price growth in the buy-to-let sector "the most sluggish" prices for properties under £810,000 went up by only 1.3%, according to LCP. And when you factor in all of London, that's when you arrive at the price fall of 0.6% quoted by Nationwide. In fact, the number of transactions completed in Greater London last quarter was down 24% on the same time last year, points out LCP.

Only 88,545 sales were carried out, which is half the number seen a decade ago. "Concerns around Brexit have impacted the feel good' factor which drives buyers' decisions", says Naomi Heaton of LCP, "while affordability issues resulting from caps on mortgage lending have hampered buyers' ability to trade up" or buy a house for the first time in London.

Even outside the London bubble, the housing market seems muted. Prices in September were just 2% higher than they were at this time last year. That's the lowest year-on-year change we've seen in any month over the past two years, and down from a high of 5.6% in August 2016.

Moreover, August this year was the ninth month in a row where the number of buyer enquiries fell, according to the latest survey from the Royal Institution of Chartered Surveyors. The number of newly agreed sales was also down by 4%.

Yet it's hard to see the trigger for a full-blown property-market crash. Although inflation (currently at 2.9%) is still above wage growth and thus putting pressure on household disposable incomes, mortgage rates remain low and employment high.

The government's planned £10bn injection into its help-to-buy scheme will also likely prop up prices (often in areas where demand is relatively low, which is one big criticism of the scheme). Even if the Bank of England raises rates as it is hinting, a significant rise seems a long way off. With little obvious catalyst for lower prices on the horizon, the affordability problem is unlikely to go away soon.