An Investigation into the Factors Affecting the Increase in Residential Property Market Value in London

Posted: January 4th, 2023

Wassem Edilby

Tutor: Upeksha Madanayake

An Investigation into the Factors Affecting the Increase in Residential Property Market Value in London

3.2 General Public

London has traditionally experienced population outflows outweighing inflows due to the high rate of property price increases. Although this exit was slowing down swiftly up to 2009, it accelerated in 2016-17 to exceed 100,000 residents (Meen). Home ownership in London has been incentivised by the belief that it is the pathway to prosperity. In addition, homes are seen as a sensible store of value, considering that increasing residential property prices indicate an increase in wealth for the homeowners. In this regard, buying a more expensive home progressively, is seen as moving up the wealth ladder, making London homeowners change homes more frequently than in other cities in the European Union    (Coelho, Dellepiane-Avellaneda, and Ratnoo 32). The truth of this perception was captured by significant returns on value enjoyed by homeowners in London. For instance, every £1,000 invested in a London home two decades ago earned £14,987 by 2016 (Ferguson). London has other attractants, such as being a good place to work due to the well-developed infrastructure and high salaries and the global financial capital alongside the presence of headquarters of major multinational corporations and the diverse culture and history (Saunders). This mentality explains why many people seek homes in London, regardless of their buying ability, along with the emergence of innovative home-buying approaches. For instance, McKee, Muir, and Moore (65) noted that low-income Londoners have been able to buy the houses they occupy from the council. The right-to-buy is a UK government policy introduced in the 1980s to enable low-income earners to become homeowners. However, this approach has been undermined by the bedroom tax, which restricts rent assistance by raising the eligibility for a shared accommodation rate from 25 to 35 years old (McKee, Muir, and Moore 65).   

Shared ownership is a concept that has emerged to assist first-time homeowners that do not earn enough to qualify for mortgages to finance the full cost of a home. The home buyer buys part of the property using a mortgage and rents the rest. However, the buyer can gradually increase ownership and reduce rent until 100% ownership is achieved. Since its launch in the 1970s, it has helped 200,000 Britons, most of whom are Londoners, purchase their first homes (Hunt). Peachey noted that housing associations (HA) resold most of these houses, while the council newly built others. Londoners can access funding for 40% of the home value from the government equity scheme. However, this facility is only available for new homes and is interest-free for the initial 5 years (Peachey). Incidentally, households in London tended to move once in every two decades, currently, which is often the lifetime of many mortgages (Finance UK 4). However, during the housing boom before the 2007 financial crisis, the years between home moves were as low as 12 years, although it did not reach the 8-year lows of the 1980s. At the onset of the financial crisis, homeowners held on to their premises for up to 2-and-a-half decades before moving (Finance UK 6).

However, despite the great desire to own homes in London, 164,365 Londoners did not have permanent residences. This state of affairs was associated with high rents and insufficient housing benefits from the government to finance rents (Rovnick). This number had increased to 179,068 people by the end of 2019 following the addition of about 2,000 more from the previous year. Moreover, while homeowners were more than renters in in London in 2000, with a ratio of 60%: 40% respectively, these figures have flipped in 25 years (O’Sullivan). Therefore, the dream to own a home in London is increasingly becoming elusive as renters seek ways of converting into homeowners to benefit from the high residential property value.        

3.3 International and National Investors

Local and national investors focus on building residences for sale or rent, renting residential premises for business or the buying and selling of residential units for a profit. The construction of new residential units in London is constrained by the high cost of land. Land for the construction of residential dwellings in London costs between $7.3 million and £93.3 million per hectare, in East London and Westminster, respectively. Notably, residential land in London was 3.2 times more expensive than industrial land, thus favouring industrial investors over residential ones (GLA Economics 136). Nonetheless, investors were attracted to London due to the high demand for housing, considering that the city was a lucrative and progressive working environment for employees and entrepreneurs. Moreover, being a financial capital promised a higher appeal for residential property as investments, easier access to credit, lower cost of borrowing and better storage of value (GLA Economics 136).    

International and domestic investors have made a decent income from renting residential property, since the introduction of the Assured Shorthold Tenancy in 1998 (Constantinou and Fenton 1). Moreover, the advent of the Airbnb concept of holiday letting saw homeowner become investors in the rapidly growing industry. The Financial Times reported that Airbnb listings in London had increased from 14,000 to 65,000 between 2014 and 2019 (Brooker a). These developments have incentivised the increasing residential property value in London, despite the strong headwinds from property regulatory authorities. Notably, although the 3% surcharge on second home and buy-to-let property purchases imposed by the 2016 stamp duty changes and the phased reduction of the mortgage tax relief that started in 2017 threatened to discourage investors in residential properties, it has not reversed the increasing prices on the London properties (Constantinou and Fenton 1; Pickford b). Moreover, the Conservative Party’s win in 2019 promises to secure the interests of investors, who are intent on profiting from the high property prices in London. Already, wealthy investors had taken up luxury homes in London shortly after the general election results to demonstrate their confidence with the incoming government (White).   

3.4 Government

The government has managed to maintain a stable interest rate over 25 years despite the housing booms in the 2000-2007 and 2012-2016 periods. The Monetary Policy Committee maintained an interest rate of 0.5% since 2009, despite the sharp rise of house prices in this period in London (Constantinou and Fenton 7). Moreover, landlords were favoured by the Assured Shorthold Tenancy, which was part of The Housing Act of 1988 (Constantinou and Fenton 1). This regulation resulted in an upsurge in investments in buy-to-let (BTL) property, enabling novice homeowners and entrepreneurs to become investors in the property market.  

The government has not been intent on taming the rising property prices in London, because it is a beneficiary from the higher taxes. Imposing a higher stamp duty on property and reducing the landlord tax relief are half-hearted attempts by the government to reverse the rising property prices (Office for National Statistics). However, going by the changing tax regimes and the high number of homeowners in London, government was collecting more taxes, with London accounting for 61% of the stamp duty collected in the UK in 2019 (Finance UK 8).

Brexit presents uncertainties that are affecting the prices of homes in London and the behaviour of buyers and sellers. The Financial Times and Forbes reported that the government’s delay in striking a Brexit deal was making people anxious, with some sellers holding on to their properties expecting that prices would rise in future (Barker; Pichford a). In turn, opportunists were buying residential property hoping to reap a profit from price increases when the Brexit deal was sealed (Pichford a). The Financial Times noted that optimism had returned to property investors since the Conservative Party Win in 2019 (Brooker b). They expect the Conservative Party government to be more accommodative of the Luxury property market compared to a Labour government (Brooker b). However, the ongoing corona virus epidemic was threatening to wipe out this optimism, with the number of positively-tested individual having reached 90, according to The Week UK. There were worries that the 26.4% and 2.4% increase in the number of sales and average prices of properties, respectively, between February of 2019 and2020, would be reversed. The concern was that the homebuyers would be locked in their houses, thus avoiding shopping for property (The Week UK). The Telegraph reported that while the virus epidemic would slow down business in the property market, the side effects on the economy could be more devastating (Hall). The possible slowdown in the economy could affect property demand and stock market adversely unless the government moved in to restore investor and public confidence by addressing the infections comprehensively (Hall). However, residential property owner and traders in London are a powerful force that causes the government to be challenged between influencing the market trends on property and increasing accessibility and affordability of homes. The government has favoured the interests of homeowners through its lower involvement in the local planning and social housing development (Coelho, Dellepiane-Avellaneda, and Ratnoo 42). Altogether, the government has facilitated the increase of property prices in London by adopting a hands-off attitude and letting the market forces dictate the value based on demand and supply forces. Moreover, the rebounding of property prices following uncertain circumstances, such as Brexit, is reflective of the robustness of the UK economy. Curtis talked of the rebounding effect on unlocking the ‘pent-up’ demand and pushing prices even higher as a positive outcome. This reflects the importance of London’s high-valued property market to the government, which explains it allowing for market forces to reign.

3.5 Banks/Large Organizations (Mortgages)

Between 1995 and 2007 when house prices rose dramatically, banks increased lending to home buyers. Mortgage lenders like Bradford & Bingley and Northern Rock borrowed money from the market to increase mortgage financing. In turn, the cheap credit encouraged people to invest in the property market between 2004 and 2007 (Greater London Authority, a 1). In this regard, there was robust flow of capital from large and small private investors in their attempt to diversify to real estate from equities. Consequently, pooled funds expanded rapidly and invested heavily in the property market (Greater London Authority, a 7). 

Mortgage lending has grown two-fold since 2009, reaching £268 billion. Although mortgage lending has undergone minimal innovation over the last decade, it supported more than 70% of residential property purchases (UK Finance 3). The only innovation in the mortgage products was lengthening of the borrowing times, with some extending into the retirement of the home buyers (Finance UK 29). UK Finance also revealed that after deducting repayments, the net lending though mortgages has increased from £10 billion to £50 billion between 2009 and 2019. Despite this increase, the number of residential property owners with mortgages was 13% lower than 10 years ago. This reduction was because older households were paying off their loans, while first-time homeowners that were buying property were starting to level off as demand slowed down (UK Finance 3). Financial institutions gave out 40,480 new mortgages to first-time homeowners in London in 2019, registering a 0.9% increase from 2018. On average, the homebuyers obtained loans that were 3.8-fold of their income. Similarly, home movers obtained 26,790 loans in 2019 as well (GLA Housing and Land 4).    

3.6 Population and Geographic Size of London

London’s population has grown tremendously since 1995 after recovering from the low of the 1980s (Greater London Authority, c 6). To house the 8.91 million Londoners, 3.56 million residential properties existed in 2018, after increasing from 3.09 million units in 2001 (Statista). Therefore, currently, the number of homes and households are almost equal, with the homes being slightly more than the households (Greater London Authority, c 5). This growth is attributed to more new building being constructed and commercial buildings were being converted to residential dwellings, alongside the reduction in demolitions (Greater London Authority c 5). However, while the room per capital among the Londoners has been rising steadily since the 1910s from an average of one room to two rooms by early 2000, this trend was reversed in 2011 when the rooms per person fell for the first time (Greater London Authority c 5). In this regard, overcrowding has gradually reduced in London residential dwellings despite the trend reversal observed in 2011. Most of the Londoners are accommodated in outer London rather than in inner London, with 2011 figures indicating 1.9 million against 1.4 million respectively. Incidentally, the average household had remained stable since the 1990s, holding at around 2.4, compared to the 3.8 levels of the 1930s (Greater London Authority b 7). Moreover, home ownership has been decreasing across all age groups except among those above 65 years, since the 1990s. The over 65 year age group surpasses the 45-54 years old cohort in home ownership. In the 1990s, 71% of the 45-54 year olds owned their homes compared to 49% of those above 65 years old. By 2015, the proportion of the 45-54 year olds had reduced to 54%, while that of the above 65 years has increased to 67% (Greater London Authority c 11).  

Residential property in London is either own by the occupiers or rented from private or social entities. The proportion of Londoners under social housing has been reducing since the 1980s and has remained between 20% and 30%. However, the new millennium saw the proportion of those living in their own homes reduce from a high of almost 60% to less than 50% currently. Contrastingly, the proportion of tenants renting privately has increased gradually since the 1990s, when almost 10% of Londoners rented houses to over 30% currently. In this regard, the tenure mix has levelled out over time, with mortgagers equalling private renters at 28% of the Londoners in 2016 (Greater London Authority c 9).       

The number of new homes built in London per year has remained stable in the last 10 years. The new home additions have averaged 20,030 homes annually, with 2015 registering the highest level, at 24,390 new dwellings (Greater London Authority c 12). The constructions residential dwellings were more in outer London than in inner London, although the number of households has grown faster in inner than outer London (Greater London Authority b 7). In the same regard, inner London homes tended to be older, with new building being found in industrial areas and former dock after the changing the use of these sites (Greater London Authority b 5). However, these figures remained below the historical highs of the 1930s. In addition, private developers and housing associations have constructed most homes since the 1990s, with the local authorities not being involved in the construction as was the case in the 60s, 70s and 80s (Greater London Authority c 12). The distribution of the residential property in London has not changed much since the Second World War as it has followed historical urbanization trends. The densest residential areas in London were Pimlico, Isle of Dogs, City Fringes, Paddington and Mayfair (Greater London Authority c 15). Also, the social housing units are the most concentrated residence in London, with much of these dwelling being found in inner neighbourhoods in the city (Greater London Authority b 5). The number of residential property sold between 1995 and 2019 has reduced significantly across all property types. Using data from the Land Registry, the reduction is summarised in table 1.

Table 1. Number of residential units sold between 1995 and 2019

Unit type	Year	Change (%)
1995	2019
Flat	2856	2235	-22
Terraced	1942	1298	-33
Semi-detached	698	412	-41
Detached	163	105	-36

Source: Home.co.uk

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