Incomes in the capital are much higher, too, at 126 per cent of the English average and – despite more households moving out of the capital to other parts of the country than moving in – new building in London still fell short of the growth in households by about 12,000 a year over the last five years.
Outperformance
It is not surprising then that London’s housing market has been outperforming other parts of the country.
The price growth story is well known – prices in London are currently 15 per cent above their 2007 peak while the average for England and Wales is still 8 per cent below. Meanwhile, the average in the north is still more than 20 per cent below the 2007 peak. Transactions data tells the same story.
Even though affordability is much worse in London, house-buying activity is now just about 30 per cent off the 1997 to 2007 average level. Comparable figures for England and Wales show transactions are about 40 per cent off this long-run average, while in the north of the country the transaction level is still about 45 per cent off.
But, looking more closely at the data has revealed a much more interesting and less straightforward picture than the one of London being a special case.
Even though the average house price in England and Wales at £167,353 is still well below £250,000, the proportion of market activity in this sector has fallen from over 76 per cent at the peak of the market (when the average price was about £180,000) to 70 per cent today.
Prices and transactions have been growing across the country, driven by the most expensive market sectors.
Looking at house price growth for England and Wales as a whole, prices in the least expensive bands have grown least. Indeed prices in the least expensive bracket are still about 10 per cent lower than in 2007. Prices in the £250,000 to half a million band are up by almost 10 per cent, but those priced more than half a million are about 30 per cent higher.
Higher prices in London have introduced a little bias into the price data because prices in London have breached the half million barrier sooner.
But looking at the local London boroughs has confirmed that this is a phenomenon driven by stronger market performance in the most expensive areas rather than being a capital versus the rest of the country phenomenon. Prices in the more expensive boroughs have risen the fastest. Hackney saw a price increase of 15 per cent over the last year and it is today the seventh most expensive borough in London.
Prices in the central London market – even excluding the prime boroughs of Kensington and Chelsea and Westminster – rose by 12 per cent. In stark contrast, Newham prices increased by just 2 per cent. Newham is the second cheapest borough after its neighbour Barking and Dagenham.
The explanation is quite simple. In the more expensive parts of London the levels of unemployment are much lower and the rate of wage growth in general is higher. Add on top of that the demographic of the people in those boroughs, which is likely to mean that they are on a career ladder moving up pay scales with promotions, keeping ahead of increases in the cost of living. Access to credit is easier and that adds lubrication to the housing market process.
As a result, the most expensive sectors of the market were less touched by the credit drought than the mainstream sectors. Some overseas activity helped in London, but it is also the case that richer people, let alone high net-worth individuals – regardless of their nationality – found access to credit more easily, if indeed they needed it at all.
Prime central London has had a particular boost from more overseas buyers – again less constrained by the availability of finance – but even domestically resident high net-worth individuals have little to worry about when it comes to securing finance if they want to.
But price rises are not all about cash buyers and international jet-setters buying up property. Indeed, there is an increasing proportion of domestic buyers active in the London market at present. Data shows that the proportion of UK buyers in London increased from 65 per cent in 2012 to 77 per cent in 2013.
Transactions data tells the same story across the whole of the country. Activity in the higher-priced bands has been much greater than in the lower-priced market sectors and was much more resilient during the downturn, as the chart shows.
Mortgage approvals data has shown the same trend. While the number of approvals sank by almost 80 per cent, their average value sank by just 28 per cent. The average mortgage approval has been trending up since 2010, even though house price growth has been modest, and jumped up in the last quarter of 2013. The average mortgage approval for house purchase was almost £172,000 in December 2013, 3 per cent more than the average house price of England and Wales. We know that is not because the loan-to-value ratios have been more generous – that is clear from Council of Mortgage Lenders’ data for both first-time buyers and former owner occupiers. This data has shown that both have been stable over time and not more than 80 per cent even for first-time buyers. So the explanation is that there have been more purchases at the more expensive sector of the market.
Recovery
So, while the housing market has been going through a truly welcome recovery, it is perhaps not as widespread, even in London, as some would have us believe. Rather it is concentrated in the most expensive sectors of the market while the mainstream is still relatively subdued. In order to get a healthy, efficient and more importantly sustainable housing market, there needs to be more activity at all levels of the market. That will allow the labour market to work properly and help to sustain an economic as well as a balanced housing market recovery.
Fionnuala Earley is residential research director of Hamptons International Mortgages
Key points
* House prices in London have been increasing at an annual rate of 11 per cent.
* This is a phenomenon driven by stronger market performance in the most expensive areas rather than being a capital versus the rest of the country phenomenon
* The average mortgage approval has been trending up since 2010, even though house price growth has been modes
