EY ITEM Club Special Report on Housing
London and the other UK regions: mind the gap
With amazing speed, the national narrative about the housing market has shifted from mid-recession concerns around possible negative equity to the question of whether a new housing bubble is building up.
A sub-theme of this debate is the perception of a widening divide between London & South East versus the rest of UK. As our EY ITEM Club special report shows, this generalisation is as true as it is sweeping. Indeed, the differences are so stark that momentum is now building for measures to cool down the London market without dampening activity and prices elsewhere.
However, even in London there are stark variations between local ‘mini-markets’ that could impact the effectiveness of London-only cooling measures. At one extreme, it seem clear that the luxury end of the London market – from Mayfair to Belgravia, and parts of St Johns Wood and Marylebone – will not be a bubble that bursts anytime soon, given the continuing interest from international cash buyers and the seemingly irresistible global draw of London’s ‘X-factor’.
Outside this rarefied subsector, there are thousands of new homes under construction or in the development pipeline in areas like Stratford, Battersea and Elephant & Castle. While these houses are already expensive compared to the rest of the country, they’ll remain affordable to enough well-paid Londoners or foreign investors to keep driving prices strongly upwards.
The market in the rest of the UK has very different dynamics, and now seems destined for a welcome return to modest and hopefully sustainable growth. It will be a while before key infrastructure projects such as HS2 start to help narrow the gap with London. But the restoration of steady regional value growth is a step in the right direction.
Given this situation, it may seem to make sense to take targeted ‘London-only’ cooling measures, such as capping income multiple on mortgages. However, such a measure could have unintended consequences. On the positive side it might rein in aggressive lending and over-exuberant borrowing. However, on the downside, such seemingly simple cooling levers could create complex new distortions – such as tilting the market in favour of cash buyers from overseas, and against local people looking to trade up using mortgage debt.
So much for the demand side. On the supply side, most house-builders have survived the downturn and were sufficiently farsighted to build up cheap land banks ready for the recovery. That upturn is now under way, following a period of six years or more in which less than half the annual national housing need has been built. In the listed house-building sector there have been some stellar performances – and even residential estate agency IPOs. The tide has turned.
Looking forward, don't be surprised if value growth in the London housing market remains stubbornly defiant to cooling measures – not only because of limited housing supply, but also just because it’s London!