A Tale of Two Cities
“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness…” So starts Charles Dickens most famous novel, A Tale of Two Cities. And while this opening paragraph from what is arguably one of the most famous works in the history of fictional literature was penned way back in 1859, one cannot help but draw comparisons with the modern day UK property market.
A recent report from Rightmove PLC, Britain’s biggest property website, shows that the gap between prices in the North and the South of the country is now at the widest ever, with average values in the south at £336,743 (around R4,3 million). This is more than double the North’s £164,347 (about R2 million). National asking prices rose 1.2% in October from a year earlier to an average £239,672 (about R3 million). In London, prices were up 7.5% on the year!
First time buyers in London and the South-East find themselves locked out of the housing market as huge deposits, soaring house prices and tougher mortgage criteria make it impossible for them to buy. Yet sales of London’s luxury homes reached a record high in October as foreign buyers piled into London property, looking to protect their wealth amid financial or political volatility at home.
Despite an aggressive easing of monetary policy by the Fed, the US economy continues to suffer and Europe’s sovereign debt crisis may be worse than the Great Depression (according to Bank of England Governor Mervyn King). Additionally, uprisings in countries including Libya, Syria and Egypt have cost a total of $55,84 billion (about R470 billion), consultant Geopolicity Inc. said in a recent report.
Value Investing
As a result, London property is now viewed by the wealthy of the world as the “new Swiss bank account” for parking their wealth. Overseas buyers make up 65% of the market for homes costing more than £5 million, and buyers from the Middle East, North Africa, Eastern Europe and the former Soviet Union have pushed prices in London’s most desirable neighbourhoods to new records. Values in West London have risen 94% since 2006, compared with 87% across prime central London residential property. With such a huge influx of foreign buyers and with new house building at a post-war low – with just 134,000 new homes built in the UK in 2010 according to Government figures – there are stark warnings that home ownership in England will fall over the next decade to the lowest since the mid-1980s. Oxford Economics predicts that the proportion of people living in owner-occupied homes will decline from its 73% peak in 2001 to just 64% in 2021.
Rentals On the Up
In London, it predicts that the majority of people will rent property, with home ownership in the capital falling to just 44% by 2021. That means around six out of every ten Londoners will live in rented accommodation. This decline in home ownership is putting pressure on the demand and price of rental homes, and the average private sector rent is set to increase by 19.8% over the next five years. In a survey of some 6,000 members of ARLA – the regulatory body for letting agents in the UK – 74% of respondents said demand outstripped supply in the private rental sector. This is the highest level since records began. The increase was most acute in London and the South-East, the survey said, adding that some tenants were now staying in properties for 19 months – which is a record – as they were wary of finding a new property in a highly competitive market.
What’s Next?
There is no denying that the UK now has a two-tier housing market, with growth in the Northern regions remaining subdued, while London and the South-East soars ahead. But more importantly there is also a new housing market model. The attraction of the London property market’s transparency and relative liquidity at most stages of the property cycle has increasingly been supplemented by the significant rise in demand for rented accommodation, as well as the associated growth in rental values.
This makes London property an even more desirable asset for both the wealthy foreign and domestic property investor, who will keep snapping up property, reducing the available stock and pushing prices higher as a result. This will in turn lead to more Londoners being priced out of the market, leaving them no other alternative but to rent, pushing rents higher yet. And so the whole upward cycle starts again.
For more information on investing in London property, visit http://www.smutsandtaylor.com/.
Story by Mike Smuts (First Published in REIM: http://www.realestateinvestormag.co.za/)
