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The evolving London property market

Growth may be slowing for house prices, but the long-term outlook still looks promising.

In 2015, London’s booming population will exceed 8.6 million, matching the previous population peak reached in 19391. That was followed by a world war and decades of decline, while today, the future is much brighter.

The capital’s recent expansion is the result of its renewed status as a thriving, cosmopolitan global city, attracting business, talent and money from all over the world. More than 10 million people are expected to live in London by 2029, rising past 11 million by 20502.

Not surprisingly, London’s popularity is reflected in its frenzied property market. A typical home in London is now worth £475,000, more than double the average for England and Wales3. New properties in the most sought-after areas of London, such as Mayfair and Knightsbridge, are some of the most expensive in the world4.

Whether you want to buy a home to live in or rent out, property in London is widely viewed as an attractive investment over the long term.

Nevertheless, it is important to bear in mind that prices could fall, as they did in the wake of the credit crunch and, more steeply, in the 1990s.

Fortunately for prospective buyers, various factors support forecasts for a steady rise in valuations in the coming years. Here, we look at the prospects for London property and ask how you could invest.

How has London property been performing recently?

Last year, prices across the city rose by a staggering 17%, after rising 11% in the previous year, fuelled by low interest rates, a shortage of new house building and a wave of foreign investment5. There were more than 68,000 residential property transactions in London in 2013, almost double the number in 2009 and close to the peak in 20076.

Overseas buyers bought a fifth of all homes sold in the London Boroughs of Westminster, Kensington & Chelsea, and the City of London in 20137 and more than two-thirds of new-build properties in these prime central London areas8.

This recent flood of foreign money into the top of the market has had a knock-on effect on lower rungs of the property ladder. Areas on the edges of central London, such as Islington, Battersea and Fulham, have done particularly well recently, along with Hackney in east London, which has seen prices soar as a result of rapid gentrification9.

After a frantic couple of years, the London market is now likely to pause to catch its breath. But with the long-term outlook remaining positive, this could spell an opportunity for new buyers.

A bumpy year for the London market

London prices have now exceeded their pre-crisis highs in euros and US dollars, which may temper demand at the top of the market. The sanctions against Russia and its descent into recession amid the plunging oil price are expected to dent a key source of demand for prime London property.

Meanwhile, supply in the prime market has also been rising, with a wave of construction projects across the capital. Thousands of new premium homes are being marketed as part of new developments in Nine Elms, south west London and along the South Bank.

The macroeconomic backdrop in the UK has also added to uncertainty over demand for property in the near-term.

Changes in taxation

There are further changes to the tax system that could temper demand for London property, especially in the prime bracket. There are two new bandings of the Annual Tax on Enveloped Dwellings, adding to the existing bandings on company-owned residential properties valued at more than £2m in April 2012.

As of April 2015, there is an annual charge of £7,000 for company-owned property valued between £1m-£2m. A charge of £218,200 applies for properties worth more than £20m, the highest band10. From April 2016, those worth £500,000-£1m will incur an annual £3,500 charge.

There may also be further charges for overseas owners of second homes in London. These comprise 17% of the prime central London market11.

In December, furthermore, the government revamped stamp duty. The old system imposed a certain rate on the whole of the purchase price. The new rates will only apply to the proportion of the price that falls within a particular duty band, as with income tax. For the majority of buyers, stamp duty will fall. However, for those paying more than £937,000, the property tax will cost more12.

What next for London prices?

The general consensus, according to property experts, is that London prices are set to dip this year, or at least grow much more slowly as a result of these factors.

The Centre for Economics and Business Research (CEBR), the respected property market forecaster, believes that prices will fall by over 3% in 201513. It points out that a number of leading indicators such as new buyer enquiries and the time properties spend on the market are already pointing towards a downturn.

Other, more bullish forecasters are also pencilling in a more subdued outlook for London. Savills, for instance, expects prices to rise just 1%14.

Inflation is expected to remain under 1% for much of this year, thanks in part to the recent decline in oil prices. Along with a rise in the value of real inflation-adjusted wages, this should boost confidence among UK consumers and support wider economic growth.

Barclays expects GDP growth of 2.7% in 2015 and 2.3% next year. In this environment, demand for housing, and prices, look set to continue. The CEBR is forecasting a 4.3% increase in London house prices in 2016 and a 5.7% rise the following year15.

Where to buy – spotting the next hotspot

Several local factors can influence prices and should be considered when buying a property. One factor that adds value is proximity to a good school, as studies have repeatedly pointed out. Transport links are also crucial. A location within a five-minute walk of a Tube station can add up to a fifth to a property’s value or rental price16.

A consideration in this context is Crossrail, the new line connecting Reading to Essex and going through the heart of London. Opening in 2019, it is generating interest in stations across its route, from Acton and Ealing Broadway in the west through to Stratford, Woolwich and Forest Gate in the East.

House prices in areas with access to Crossrail are expected to climb by 20% in suburban locations and by 25% in central London between 2012 and 202017.

The prospects for landlords

With property prices so high, gross rental yields are commonly lower in London than the rest of the country. However, investors in the capital have been compensated with impressive capital gains that have translated into strong overall returns.

The rental market looks poised to embark on a similar trajectory as house prices in the coming years. Rents are now back to their 2008 pre-crisis peak, having expanded by 1.8% in prime London in 2014, according to Savills.

Since 2011, the rental market has been subdued owing to a relatively weak employment market in the financial services sector. But the situation looks poised to improve as the London economy gathers strength. Over the next five years prime London rents could rise by 17%18.

Summary points

  • Residential property prices in London have soared in recent years, fuelled by low interest rates, a shortage of new house building and a wave of foreign investment
  • The London market is now likely to pause to catch its breath, with slight price falls expected this year amid the introduction of new property taxes, political uncertainty and the prospect of higher interest rates on the horizon
  • Over the longer-term, strong economic growth, a booming population and a structural shortage of housing should support steady house price growth in the capital
  • When thinking about where to buy, bear in mind that homes near schools and transport links enjoy higher valuations. The new Crossrail line across London could add thousands of pounds to the price of houses along its route
  • Over the next five years prime London rents could rise by 17%, which will benefit buy-to-let landlords in the Capital
  • Remember that investing in property can carry risk. Property values can fall as well as rise and you could get back less than you invested.
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Barclays seeks to ensure that the information published on this website is as accurate as possible. Please note the information on this website does not constitute legal or professional advice. Barclays accepts no responsibility for the contents of any pages referenced by an external link. Any references or links on the website to external organisations or websites are provided for the purposes of ease of access. Such links should not be taken as an endorsement of the contents of those external websites or of those organisations.

1 http://www.itv.com/news/london/2015-01-05/londons-population-set-to-hit-a-record-high-this-year-of-more-than-8-6m/
2 Greater London Authority,November 2013https://www.london.gov.uk/sites/default/files/Population and employment projections to support the London Infrastructure Plan 2050.pdf
3 Land Registry, December 2014
4 CBRE, Global Living: London in an international context, October 2014
5 Land Registry, December 2014
6 HMRC, June 2014https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/323126/2014_AUKPTS_circ.pdf
7 Department for Business, Innovation and Skills, cited in The Daily Telegraph, 18 September 2014
8 Knight Frank, October 2013http://content.knightfrank.com/research/556/documents/en/oct-2013-1579.pdf
9 Land Registry, December 2014
10 https://www.gov.uk/annual-tax-on-enveloped-dwellings-the-basics#annual-chargeable-amounts
11 Savills, September 2014, http://pdf.euro.savills.co.uk/uk/residential---other/spotlight-prime-london-autumn-2014.pdf
12https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/382324/Stamp_Duty_15.pdf
13 CEBR, January 2015 http://www.cebr.com/reports/uk-house-prices-to-fall/
14 Savills, November 2014 http://www.savills.co.uk/resources/5-year-forecast/
15 CEBR, January 2015: http://www.cebr.com/reports/uk-house-prices-to-fall/
16 Savills, quoted in: http://www.telegraph.co.uk/property/property-club/10035596/good-catchment-area-properties.html
17 Carter Jonas, Track to the Future, June 2014:http://www.carterjonas.co.uk/~/media/Publications/Track to the Future REPORT june 2014.ashx
18 Savills, January 2015:http://www.savills.co.uk/research_articles/144283/183904-0

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