Change in the London residential markets

I n economic terms, the value of residences in an area is a function of both demand and supply and, therefore, changes in these can be used as proxies for the trend in values. While, in theory, supply and demand may appear to be just two sides of the same housing market coin, there is an important distinction between the two. Demand applies to a requirement relating to the whole of the existing housing stock whereas supply only applies to the marginal addition to the stock arising from construction (and losses from demolition). Because that marginal change in stock is typically very small - it may only be 1% per annum - the impact of supply on prices is really only seen in the long-term. Changes in the sentiment of purchasers (the perpensity to consume in economic terms) can, and do, have an immediate effect, and it is this that drives prices in the short-term. Most typically, such short-term changes are the result of financial changes, such as varying interest rates, employment (job opportunities) rates rising or falling, inflation rising or falling, and economic growth influencing wealth growth and confidence. With a population of some 9m (estimated 2020), London is the largest city in Europe. Since 1988, its population has been rising, fuelled by an influx of domestic and foreign graduates (looking for their first post- graduate job), immigrants from outside the EU, and by EU professionals (attracted by the the biggest financial centre in Europe). This has generated incredible demand for housing, raising house prices and rents, encouraging much new high rise and other development, and increasing ‘densification’ in the existing stock. But to put that into context, in 1939, its population was 8.6m, declining to a low in the 1980s before it grew to reach a new peak in 2018 of 8.9m. The population growth rate has been accelerating in recent decades, from 0.7% pa in the 1990s, to 1.7% pa in the 2000s and 1.8% pa in the 2001-2018 period. Until the pandemic, the consensus forecasts were for slightly under 1% pa population growth over the next 10 years, as is illustrated in the chart above. Indeed, it is probable that the population growth in 2019 and 2020 has already shown signs of slowing growth, in large part because of issues of affordability, a lesser number of graduates moving to London, fewer job opportunities in the capital, partly because of the transfer of jobs from London to the provinces by the government, and lower international migration to the city as a result of the pandemic and Brexit. Of greater concern is that PwC, in a report at the beginning of 2021, estimates that the number of people living in the capital could fall by more than 300,000 in 2021, or 3.3%, to 8.7m. What is unknown at this stage is whether the drop in growth is a permanent feature, accentuated by the apparent desire of some workers to move outside the capital so that they can afford a larger property (with room for a proper home office) and garden. The chart below shows how the southern UK markets have been performing for the last 10 years. In the recession of 20089, house prices fell significantly, but then stabilised in the southern UK regions (although continuing to fall in the northern regions) quite rapidly as interest rates were dramatically lowered to stimulate the economy. As quantitative easing was introduced in the intermediate phase on the chart, hiopuse prices rose very strongly, recovering from the falls in the 2008/9 period, led by London. The final phase was more modest growth generally, but with modest falls in London prices. That might suggest that the question of affordability was a key reason for what appears to be a shift in demand from central london to the home counties. This conclusion is reinforced by the contents of the chart below. With some variation in the first phase, the data relating to rental values shows a pattern similar to those of the capital values. We view the rental value chart as indicating demand for occupancy, and its difference to the capital value one as indicating the appetite for risk in committing to purchase. This shows some weakening in demand for London in the third phase, but still stronger demand than would be implied by the capital value line. Our conclusion from the combined intelligence in these charts is that the reduction or stabilisation of demand was mainly due to the affordability argument for central London but that there was also an element of reduced demand from a desire to move outwards from the capital. For those who are continuing to work in London, the penalty of moving further out is the increased cost of commuting, so the greater affordability of more peripheral housing is substantially, or even completely, mitigated by a reduced household net earnings cashflow, although its should be noted that this a different issue to the capital cost/commitment one that may be the determining factor in the house acquisition. But as house prices rise outside the capital and those of London stabilise or afll, the affordability argument becomes weaker and this will be the natural stabilisation. In the short term, London prices are expected to remain weak on that argument, and there are risks attached to the partial or wholly ‘working from home’ expectation, which, at the very least, will defer the stabilisation point to some what further into the future. For potential, but not committed, London investors, this gives time to invest very selectively and at what might prove good prices in the future as we see an eventual recovery in London house prices. At worst, we should expect no lesser growth in London prices than in the home counties in the medium term. After all, it is central London jobs that are driving the demand for housing in both London and the home counties.