London’s housing market has been underperforming compared to the rest of the UK for the last eight years, primarily due to sky-high property costs and shifting housing trends post-COVID. The latest figures from February 2024 paint a grim picture, showing a 4.8% decline in house prices from the previous year. This stark downturn is in sharp contrast to the small 0.2% decrease seen across the rest of Britain during the same period. Even with this decline, London remains the priciest region in the UK, with an average property price of £503,000, significantly above the national average of £281,000.
Persistent Price Divergence
This gap isn’t a new phenomenon. Data from the Office for National Statistics (ONS) reveals a consistent pattern since 2016, with London’s house prices continuously lagging behind the national growth. In fact, while the UK’s nominal house prices soared by 37% since February 2016, London saw a meager 10% increase.
Economic Shifts Post-Financial Crisis
After recovering robustly from the 2008-09 financial crisis, with house prices in London outpacing the national average considerably between 2014 and 2015, the capital’s market began to cool significantly from 2016 onwards. According to Robert Gardner, chief economist at Nationwide, the main issue has been the lack of affordability, as prices reached historically high levels relative to incomes. At one point, London house prices were more than double the national average, the highest ratio since records began in 1968.
Impact of Brexit and Regulatory Changes
The Brexit vote in 2016 marked a significant turning point, dampening employment growth and reducing inward investment due to increased uncertainty. Regulatory changes also played a role, including tax adjustments for landlords and new capital gains taxes on property sales by overseas owners. These factors combined to restrict the influx of investment that had previously driven up prices.
The COVID-19 Effect
The pandemic further reshaped housing preferences, sparking a “race for space” as homebuyers sought larger properties, often outside urban centers. London’s market, which had already been tepid, was hit hard by this shift. While the rest of the UK saw house prices rise by 22% above their February 2020 levels, London only recorded a 6% increase.
Current Economic Conditions
The Bank of England’s decision to raise interest rates from 0.1% at the end of 2021 to 5.25% last summer has exacerbated the affordability crisis in London. With valuations already stretched more than elsewhere, the capital’s market has been particularly sensitive to these changes.
Future Outlook
Though rental growth in London is expected to slow down from the record 11.2% year-on-year increase seen up to March, experts are divided on the future of house prices. Some, like Andrew Wishart of Capital Economics, believe that with earnings starting to outpace house prices, the long-standing underperformance might be drawing to an end. However, Tom Bill from Knight Frank cautions that any significant recovery in the capital’s housing market will not be swift and predicts continued underperformance in the near term.