House prices have fallen in London on an annual basis for the first time in eight years but overall house price growth in the rest of the UK was stable at 2%, the latest index shows.
Nationally month on month pries increased by 0.2% in September, taking the average cost of a home to £210,116, the figures from lender the Nationwide reveal.
Overall activity in the housing market is subdued compared to historic trends and it is low mortgage rates and healthy rates of employment growth that are providing some support for demand, but this is being partly offset by pressure on household incomes, which appear to be weighing on confidence, according to Robert Gardner, Nationwide’s chief economist.
‘The lack of homes on the market is providing ongoing support to prices. House price growth rates across the UK have converged in recent quarters. Annual growth rates in the south of England have moderated towards those prevailing in the rest of the country,’ he said.
‘London has seen a particularly marked slowdown, with prices falling in annual terms for the first time in eight years, albeit by a modest 0.6%. Consequently, London was the weakest performing region for the first time since 2005,’ he added.
The fall in London and subdued market activity comes at a time when experts believe that an interest rate rise is likely before the end of the year. At its September meeting, the Bank of England’s Monetary Policy Committee (MPC) signalled that, if the economy evolves broadly in line with its expectations, an interest rate increase is likely in the months ahead and this would be the first increase in the Bank Rate since July 2007.
‘Clearly, much will depend on how the economy evolves, but most economists and financial market pricing suggest that a small rise of 0.25% is likely at the MPC’s next meeting in November, which would take Bank Rate to 0.5%,’ Gardner pointed out.
But he does not expect a modest rise in the Bank Rate, by itself, to have much of an impact on economic activity. ‘Financial market pricing suggests that Bank Rate is only likely to rise by around 1% over the next five years. Providing the economy does not weaken further, the impact of a small rise in interest rates on UK households is likely to be modest,’ he said.
‘This is partly because the proportion of borrowers directly impacted will be smaller than in the past. In recent years the vast majority of new mortgages have been extended on fixed interest rates,’ he added.
Not everyone is worried by the marginal fall in prices in London. According to Russell Quirk, chief executive officer of eMoov, it is probably a continued ripple effect from the summer holidays as schools. ‘There are optimistic signs that the resilient London market will catch up to the rest of the UK in the coming months,’ he said.
According to Nicholas Finn, executive director of Garrington Property Finders, double digit rates of annual price growth were always going to be unsustainable in London. ‘The softening of prices was initially led by London’s prime market, which was knocked sideways both by Brexit and in the wake of the introduction of higher rates of stamp duty for high value homes,’ he explained.
‘But it is now spreading from the central boroughs, which saw prices rise fastest during the boom, to other areas where the growth came later. As a result the market is at an inflection point as prices gently correct to more realistic levels,’ he said.
‘While supply still remains a problem, demand is holding up well, even if the power dynamic has shifted decisively in favour of buyers. London home owners who want to sell up and move out are increasingly having to take what they’re offered,’ he pointed out.
‘In London as elsewhere the market is still relatively free flowing, despite the low transaction numbers and pragmatic sellers who are willing to adjust their price expectations are still able to achieve the sale they want,’ he added.
The decline of the market in London is positive as it will help to get the market moving, according to Lee James Pendleton, director of independent estate agents James Pendleton. ‘London has been an overvalued market for at least the last three years. This shows vendors and agents are becoming more realistic,’ he said.
‘But you’ve got to use an agent that is going to tell you what you need hear. People have got so used to prices going up and the result is too many people have been priced out. London cooling is going to really engage buyers and put us on a better, more stable footing towards the end of the year,’ he explained.
‘People have got to get out of the habit of thinking of their property as an investment but as a home, quite soon they may not have any choice,’ he added.
Jonathan Samuels, chief executive officer of property lender Octane Capital, also believes that a correction in the London market was inevitable. ‘Extreme supply issues within the M25 coupled with always-on demand will mean the London market can only fall so much. In reality the ongoing correction will be a positive in the longer term. Even by London standards, prices in some areas of the capital had become frankly absurd,’ he said.
‘For the broader market, low supply, strong employment and low borrowing costs are keeping things ticking along, although high inflation and the possibility of the first rate rise for a decade remain a threat,’ he pointed out.
‘When rates do go up, whether this year or next, it will be a symbolic moment. Even though the likely quarter per cent increase would not be a game changer, the fact that it represents the beginning of the interest rate upcycle is a major psychological development,’ he concluded.
Alex Gosling, chief executive officer of online estate agents HouseSimple, pointed out that the Government’s reform of the stamp duty bands and the introduction of a second home stamp duty surcharge hit the London housing market more than any other region.
‘Brexit fears are also scaring off overseas investors who supported the London market during the years after the financial crash. Prices in London are out of reach for all but the privileged few, and the Bank of Mum and Dad has had to make some pretty sizeable withdrawals in the last few years to help young buyers climb onto the property ladder,’ he said.
