Greater London house price growth of 6.9% predicted in 2013

Key Points:

·      Prices to rise in PCL by 8.4% this year up from previous forecast of 5%

·      Return of bidding wars in some areas of London

·      Rental growth static at 3% in 2013

·      Prospect of rising base rates a concern

Greater London house prices are set to grow by 6.9% this year, annualised at a rate of 3.2% over the next five years as the Government’s Help-to-Buy scheme is extended to all homebuyers from next year bringing more financed buyers to the market without an equivalent increase stock, reports Cluttons in its Residential Property Forecasts – Q3 2013.

The consequence of this pace of uplift in house prices will push ownership in and around London out of reach of yet more households. Even in London where earnings tend to grow slightly ahead of the national average, it is unlikely that average earnings will keep pace with this rate of house price growth over the next two years as the economy struggles back to strength.

The position is more acute in prime Central London where Cluttons has revised its forecast of 5% house price growth to 8.4% this year with an annualised average of around 4% to the end of 2018. Credit ratings agency Fitch has also warned that Help to Buy could artificially push up house prices without increasing the number of homes built, which corroborates Cluttons' expectations of affordability re-emerging as the central issue for buyers given that mortgage lending has improved.

The upturn in prices has caused a return of bidding wars in the capital which has tempered the capacity of first time buyers to enter the market. Greater acceptance of buy to let mortgages for those wishing to rent and buy or rent further from London has further reduced the availability of stock traditionally available to first time buyers.

Sue Foxley, head of research at Cluttons said: “Improved consumer confidence, an easing in mortgage credit and the raft of government policy intervention measures to bolster new buyer demand will drive further capital growth and this has led us to revise our forecast to 8.4% price growth this year.

“The prospect of rising base rates over the medium term proffers a further concern with the ratio of residential values to gross earnings already over seven in London. With few signs of a dramatic increase in supply that would have the potential to change the balance of this equation, the rental market will inevitably move up the agenda for London’s households and policy makers.”

Cluttons also reports that rental demand in Central London remains strong but individual and corporate rental budgets are subdued which is translating into RPI, nil or slightly negative rental growth. Cluttons forecasts London rents to grow by 3% this year, with an annualised average of 4% per annum to the end of 2018 which is in line with long term average earnings growth for London.

Surge in tenant demand in peripheries of prime Central London

Tenants are seeking to move to the peripheries of prime Central London - sparking a surge in demand, say Cluttons in their latest property report.

Cluttons has also upgraded its forecast slightly for house price growth in prime Central London to 5% this year, with increases of close to 4% per annum expected between 2014 and 2018. 

 Key points:

·       Rents in prime Central London rose by 1.7% in Q1 2013
·       Tenants are being drawn to peripheries of prime Central London (zones 2 and 3)

·       Eastern areas such as Isle of Dogs, Limehouse and Wapping see 41% quarterly increase in tenant demand

·       In southwest, Clapham, Battersea and Wandsworth see 53% rise in tenant demand

·       Rental growth of 3% forecast for 2013, followed by 3.5% in 2014

Tenants are seeking to move to the peripheries of prime Central London, primarily zones 2 and 3, in search of lower budget properties as they attempt to minimise outgoings, reports Cluttons in its Residential Property Forecasts - Q2 2013.

Average weekly rents of £1,016 in prime Central London remain broadly unchanged from this time last year, but the volume of applicants with higher budgets is in decline, a trend which is expected to persist over the coming months.

While tenant demand in the capital is still being supported by students and new job starters, the cost conscious behaviour of businesses is being reflected in reduced accommodation allowances. This is impacting on demand and asking rents for higher budget properties.

Consequently, tenants are spreading their wings to focus on lower priced properties in zones 2 and 3, as they seek to minimise outgoings, particularly as stubborn inflation continues to erode real incomes. Areas to the east including the Isle of Dogs, Limehouse and Wapping have seen an increase in tenant demand of 42% between Q4 2012 and Q1 2013, with rents returning to positive growth in Q1 after plateauing at the end of last year.

Similarly, Clapham, Battersea and Wandsworth in the south west have collectively seen a 53% quarterly increase in tenant registrations in Q1 with a corresponding upturn in rental values across the area.

Sue Foxley, head of research at Cluttons, says:

"Supply is now creeping ahead of demand in prime Central London and this is driving tenants to seek out rent reductions at renewal. While some landlords are prepared to negotiate a lower rate or no increase to mitigate a void risk, RPI uplifts are being achieved, particularly for high demand properties such as well located two bedroom flats which suit couples and sharers alike. This is forcing a growing number of tenants to look further afield for cheaper accommodation. As a result we are seeing migration out to the periphery of prime Central London, to zones 2 and 3, where rents are significantly lower than the prime core."

Average rents in the Isle of Dogs are currently £331 per week, less than a fifth of average rental values in Mayfair which are currently £1,744 per week.

Subdued rental growth is expected to persist this year, with increases of 3% expected, rising to 3.5% growth in 2014 and 4% in both 2015 and 2016.

House price growth in prime Central London continues to be bolstered by the supply drought, resilient domestic and international demand and the relative weakness of sterling. Values have increased by 2.3% in Q1, reaching a new historic high, with buyer demand expected to grow as cheaper debt finance becomes increasingly available. This growth in capital values is also driving buyers to fringe locations in search of better value for money.