By Valentina Magri
‘Welcome to the world’s most costly city’ should be placarded at every entrance of London. Mindful tourists and Londoners have already noticed house prices rocketing, but an official confirmation came on 23th September. In light of this news, let’s have a look to the prospects for real estate in Britain, along with some useful tips to cope with the housing bubble.
The new record of London
A survey by the real estate agent Savills reports that London has become the most costly city in the world for employees, overtaking Hong Kong for the first time in five years (click to see the complete ranking). Despite this fact, London is yet (for now) to surpass the past record of Hong Kong where in 2008 the cost of living reached US$116,000 per employee per year. But living and working costs in the capital have risen by 5.3 per cent over the six months of 2014 and by 38.7 per cent since 2008.
The Savills’ ranking measures the total costs per employee associated with renting and occupying residential and commercial space. These high costs partly depend on exchange rates (a strong pound against the US dollar) and on the unquestionable appeal of London. Yolande Barnes, director of world research at Savills, argues: “I don’t think it’s desiderable necessarily to be the most expensive city to occupy, but on the other hand, you probably wouldn’t be the most expensive city if you weren’t also the most desiderable”.
According to ING International Survey on Homes and Mortgages (September 2014), London is considered the right city to make a career by people from France, Poland and Luxembourg. But the main reason of the expensiveness of London is housing.
The housing bubble in London
The UK has experienced one of the fastest house price growth rates in the Europe. Nationwide reports that UK house prices declined by 0.2 per cent in September for the first time in 17 months. The most expensive city to buy a house in Britain is London, where property values keep on rising at the fastest pace on record, even if the annual house price growth slowed somewhat: from 25.8 per cent in the second quarter to 21 per cent in the third quarter.
According to ONS data, in July house prices hit a fresh record in the capital, recording a 19.1 per cent year over year jump and taking the average price of £514,000. The record-high prices cause troubles to Brits. The ING International Survey on Homes and Mortgages (September 2014), conducted by IPSOS last July on 13 European countries together with the US, states that 85 per cent of English citizens find more difficult to buy a property now. Once asked about the level of house prices, 56 per cent of British owners and 66 per cent of renters found them “expensive” or “very expensive”. In addition, 19 per cent of Brits find difficult to pay the rent or mortgage each month, with renters struggling more to pay their housing costs: 29 per cent find it difficult, compared to 12 per cent of owners. What are the risks of this status quo?
Real estate outlook
According to Chris Williamson, chief economist at Markit, the rise in housing prices “add to worries that the property market poses a key risk to financial stability” and it increases the likelihood of a rate hike by the Bank of England, since several of his officials believe that “macro-prudential tools may be insufficient to cool the housing market”. There are many other economists worried about the housing bubble, which is one of the four enemies of the British recovery. But if we look at official figures, we notice that recent surveys show that prices are cooling. The Hometrack hose price survey shows house prices in London fell by 0.1 per cent in September. Across England and Wales, prices stagnated for the first time since January 2013. The survey shows also a widening gap between house sellers and buyers: the sale as a percentage of asked price dropped for the fourth month. The Royal Institution of Chartered Surveyors (RICS) reports plunging property price expectations for the next three months. So are houses prices near to collapse? Not at all.
The RICS estimates that 110,000 new houses were built in 2013: less than half the 250,000 a year needed to meet demand. That is the reason why Howard Archer, chief economist at HIS Global Insight, believes that “with housing supply still tight in a number of areas, house price growth seems unlikely to fall away”. Ordinary people share this belief. The ING International Survey on Homes and Mortgages found that the UK, together with Turkey and Luxemburg, have the highest share of consumers (72 per cent) who think house prices will rise over the next year. The same research shed light on how do Brits tackle the housing problem in their everyday life.
How to cope with the housing bubble
London is not only the capital of the UK but also a commuter capital. On average, people travel 45 minutes one way to go to work: it is the longest journey within the 14 countries polled by ING International Survey on Homes and Mortgages. The reason is simple: the proximity to a tube or railway station implies a high “nearness premium”. Nationwide has recently computed that a property located 500m from a station attracts a 10.5 per cent price premium (approximately £42,000) over an otherwise identical house. The tube associated with the highest house prices are Circle and Bakerloo lines, while the least expensive are Central and Metropolitan lines.
In a nutshell, renting or buying a house in the suburbs is a sure way to avoid extremely high housing prices. To have a more precise idea of the cheapest areas to live in, check out TLE’s lists of most affordable places to commute into London and to live in London, June 2014.