London house prices may not be falling down, but there’s no doubt that they are cooling down, in some cases very noticeably. From an investment perspective, the key question here is whether this slowdown is a sign of long-term issues with the London housing market (and hence a warning signal) or a sign that the London housing market simply got a bit ahead of itself and needs a bit of time to rest and recuperate. Answering this requires identifying the reasons for the slowdown and what they might mean in practice.
Realistically, some London industries are definitely in line to suffer at least short-term pain from Brexit. Financial services and education spring to mind here. Over the longer term, however, it is reasonable to assume that these industries will adjust not simply because flexibility is one of the defining characteristics of the UK in general and London in particular, but also because they both already operate on a global basis which means that they are well placed to compensate any loss of demand from the EU with greater activity in other parts of the world.
It’s also worth noting both that London’s economy is actually more diversified that is sometimes recognised, for example it has extensive tourism, media and retail sectors, and that certain areas in the surrounding commuter belt are economic hubs in their own right, for example Richmond and Slough. In short, while Brexit may be a nasty bump for London and one it would rather not have to deal with, it’s highly unlikely to destroy London or damage the long-term health of its property market.
The Mortgage Market Review
Prior to the implementation of the Mortgage Market Review in 2014, lenders used what were arguably fairly crude techniques for judging whether or not a borrower could afford a loan, typically based on multiples of current income.
These techniques sometimes allowed for self-certification and were hence vulnerable to abuse, in the form of people overstating their incomes. The problems with this situation are obvious in hindsight and, while the post-MMR world is still not perfect, it is probably healthier and more sustainable in the long term.
In the short term, however, it has acted as a brake on house-price growth as potential buyers have had to readjust their expectations with regard to how much they could borrow. In addition to this, many lenders tighten up their loan-to-vehicle ratios and started requiring more substantial deposits. Naturally, the effect of this has been most felt in the London area, where home prices have long been higher than in the rest of the country, over time, however, the impact of this change will gradually be absorbed as changes always are.
House prices are a function of supply and demand and in London, for many years, supply has been excruciatingly tight and demand strong. At this point, however, a programme of house-building in London and the surrounding areas has increased supply and hence acted to put a brake on house-price inflation.
While this may seem like a reason to be wary of buying in London right now, the fact is that London is known for its high population of “lifestyle renters” (for example students and mobile young-adult professionals) which means that there is always a strong demand for high-quality rental accommodation and, of course, buying during a downturn can go a long way to improving your overall return on investment.
Fletcher Day are a full service commercial law firm based in the City, with a team of dedicated property solicitors in London who specialise in acquisitions, property finance and landlord and tenant matters.