When my wife and I were deciding where to make our long-term home, we flipped a coin. Heads, we would stay in London. We both moved to the city to study in the early 2000s; that’s where we met for the first time and that’s where I started my career. Tails and I would move to the southwest.
The coin came up heads. But at a turning point, we both realized that we preferred the idea of ​​moving away. Bath is where we ended up.
At that time, two things occurred to me: first, we were following an established trend; one which, since the Second World War, has consistently seen more Britons leave London than move into it; and second: because house prices have risen much faster in London than anywhere else, we have effectively committed ourselves to the “slow lane” of the UK’s two-speed property market. In all likelihood, we could never afford to return to the city.
Or so we thought. Because, 15 years later, while the capital still has by far the most expensive homes in the country, this hides something that is rarely read about: London’s property market has been stagnant for years.
In the past decade, house prices in London have risen by just 13 per cent – a real drop of 16 per cent. For the average price of a house in the city, you can buy 2.4 houses in the northwest. In 2016, it would buy you 3.4 houses.
The irony is that the demand for houses in London has never been higher. After overcoming the Covid-induced decline, the city’s population reached a record high in 2023 with 8.95 million people. Given that the ONS recently increased its estimates of UK net migration for the 12 months to June of that year – and that London always attracts a large proportion of international migrants – there is a good chance that its population hit another record six months ago. While that helped push rents to record levels, it barely touched the sales market.
How did it happen?
Typically, London takes the lead in the early stages of the property market cycle. Growth starts in the center before spreading across London and, if the cycle lasts long enough, could reach somewhere like Kilmarnock. During the early stages of the cycle, younger London homeowners build equity in smaller homes before moving to more affordable locations further afield – which in turn helps to widen the market cycle.
This happened after the financial crisis, when international investors flooded in looking for bargains in Belgravia, Kensington and Chelsea. Price increases rippled outwards, first to the southeast, and then to large parts of the rest of the country.
But London house prices have been falling for the past eight years, weighed down by a decline in posh central areas.
The recent stagnation, particularly in the outer, more affordable parts of the city, can clearly be linked to rising interest rates: high prices in London make the market more dependent on high mortgages for loans and incomes, and landlords have to put up with much lower rental yields compared to the rest of the country. Without price correction, we end up in a deadlock where few people can afford or are willing to buy, and even fewer need to sell.
Longer-term stagnation is more complex, but its onset gives some clues. First of all, the tax reform in December 2014 made the purchase of higher value real estate significantly more expensive.
This started a slowdown in central London, but was quickly added to by the introduction of an additional higher rate of additional housing tax in March 2016, along with tighter regulations on buy-to-let mortgages and the phasing out of interest relief for higher-rate landlords from 2017.
All this reduced the attractiveness of buying investment properties, especially in markets with very low rental yields where the priority was capital appreciation as long as the rent covered costs.
But it is not only renters who are affected by the stricter lending conditions. First-time buyers in London are the most affected by the introduction of the mortgage stress test and the cap on credit flows above 4.5 times income. These have combined to create a situation where you can only buy if you have a huge deposit – £144,500 on average, according to UK Finance.
So unlike the rest of the country, where the number of first-time buyers has actually recovered to pre-financial crisis levels, in London they fell in 2014 and didn’t even manage to reach their previous peak during the post-pandemic mini-boom. Inevitably, given the rise in mortgage rates, the numbers have since fallen further.
While a period of no or low house price growth while incomes catch up might seem like the ideal solution to increased affordability, even that isn’t free. A recent surge in international migration and a reduced number of first-time buyers have contributed to record rent growth in London. Meanwhile, those who have managed to buy their first home will find it harder to build equity and could even find themselves trapped in homes that are too small, with some facing the added challenge of dealing with a cladding crisis or difficulty selling their shared-ownership home. .
The low level of transactions is more worrisome, as it can lead to inefficient use of housing stock, reduce labor mobility and reduce government taxes. It is also having an impact on the number of new homes being built, given that many have been targeted at buy-to-let investors or first-time buyers through Help to Buy.
Even the emergence of a new type of buyer, institutional landlords who are engaged in renting, could not prevent a decline in the supply of apartments. Government figures last week showed London added just 32,162 homes to its housing stock in 2023-24, the lowest level since 2014-15.
So far, attempts to de-zombify the London market seem powerless. Long-term mortgage products and those with higher incomes could help some on the fringes, but their supply will be limited and will suit even fewer. The price war between lenders has also eased, with mortgage rates back above 4 percent.
The question for policymakers is how they can stimulate activity without inflating house prices – taxing people’s homes could work in theory, but the political result would not be pretty, and funding the required number of new homes is a difficult challenge that will require more money. And we’ll have to wait even longer to find out who gets it given the delay in the Spending Review.
Moving away from the capital comes with a lot of compromises. Learning to keep track of time while spending an evening in London so you don’t miss the last train was a skill I had to learn early on. But, for me at least, the benefits of living in the South West outweigh those of London. The coin chose wrong, and we chose it right. Even the data is starting to add up.
Neal Hudson is a real estate market analyst and founder of the consulting firm BuiltPlace
