Property prices in London rose by 70% over the past decade, three times faster than the wider UK and pushing the average property price much higher across the region. Yet as we enter 2018, something unusual is happening. London property prices are falling.

It’s down to a number of factors including Brexit, mortgage problems and bloated prices at the top of the market. Unsurprisingly, following the political uncertainty that comes with Brexit, experts are forecasting a drop in property prices of 2% in 2018 that will stagnate as we enter 2019. The forecast doesn’t see growth until 2020, the year after we officially leave the EU when a 5% boost is anticipated. This will result in a 7.1% price increase over the next five years. By 2022, the average London property price could be sitting at over half a million pounds.

The Brexit Effect

Laurence Bowles, a research analyst at Savills believes, “London’s housing market has been pushing up against the limits of mortgage regulation and affordability for some time.

“Brexit was the tipping point that slowed price growth… Greater economic and political stability should trigger a return to growth in 2020.”

This doesn’t stop the Capital from coming out as the worst-performing UK region in a 2022 forecast. The 7% growth over 5 years is rock bottom as the north-west of England, less constrained by affordability, is predicted to rise by 18% over the same period.

Similarly, property consultants JLL found that property prices would stay flat this year but recover to 4% in 2022. This is due to a ‘strong post-2019 economy’, which will help drive housing demand and push up prices.

Property Slowdown

London has taken the main brunt of the slowdown thanks to incredible increases in values that stretched affordability for first-time buyers. The numbers have also been skewed by central ‘prime’ London property, with the top-end of the market seeing the biggest declines.

Your Move, one of the UK’s biggest estate agency chains, believes this is the steepest annual rate of decline in London prices ‘since August 2009, during the last housing slump’.

Savills believes a return to growth won’t be possible without greater clarity over Brexit. When uncertainty is rife, it’s not surprising that the market becomes much more cautious and discretionary.

One positive is the effect Crossrail has had around each station, with a 77% increase in price on properties within a 10-minute walk zone of each station (compared to a 38% increase in prime central London over the same period).

Mortgage Problems

Mortgage regulation and interest rates are also contributors to falling London property prices. In 2014, the Bank of England introduced rules that meant banks could only make 15% of any mortgages they give out more than 4.5 times the borrower’s salary. This makes life particularly hard for Londoner buyers, who are experiencing the biggest gap between salaries and property prices.

The reason for mortgage regulation is to stop people from overstretching themselves but it also caps the amount people can borrow relative to their income. This means deposits remain high for both first-time buyers and home-movers.

It’s this issue, combined with Brexit uncertainty, that’s equating to bad property prices in the Capital. Negativity around the EU exit also appears to be holding buyers back, which drives down the volume of properties being bought and sold.

Finally, price falls are mostly occurring in the expensive areas of London where affordability is tightest. Out of London’s 33 highest boroughs, the top 11 have seen prices fall by around 7%. At the other end of the scale, price falls are much lower, the 11 cheapest boroughs have only seen a fall of 1.3%.

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