Will London House Prices fall in 2008?

Evaluate whether House Prices in London are likely to fall in 2008?

London House Prices have doubled in the past 6 years.


Reasons why London House Prices may Fall?

1. Interest rates have been increased 4 times in the past 9 months. This increases the cost of mortgage repayments, making it less attractive to buy. Although, the interest rate has only increased by 1% it is still quite a significant factor. This is because:

• To get on property ladder first time buyers have borrowed a high income multiple. Mortgage payments are a high % of disposable income, therefore, a small rise in interest rates causes a big reduction in disposable income.
• Increasing number have interest only mortgages. This means that they are more sensitive to interest rate changes.
• Interest rates may rise further. This is because the bank is committed to reducing inflation closer to 2%

2. House prices have risen faster than income.

This means it is increasingly difficult for first time buyers to get on the property ladder. Many houses are now out of reach of key public sector workers.

3. Speculation.

The London housing market has seen foreign investors buying houses to try and make capital gains. If house prices slow down or even start to fall they might sell to cash in on their gains. The London housing market is more volatile than the rest of the country, swings in house prices tend to be more extreme; this is partly because supply is very inelastic.

4. Downturn in the Economy.

A slowdown in economic growth will lead to lower bonuses and smaller wage increases. Therefore, city workers will be less willing to spend extravagant sums on expensive housing. The economy may slow down as a consequence of rising interest rates, and slowdown in housing market


Why House Prices in London May Continue to Rise:

1. Prices have risen because of economic fundamentals. Demand has been increasing greater supply. In London, there is a fundamental shortage of housing.

2. Supply very inelastic in London. Rising house prices have not led to increased homebuilding, because there is a shortage of space to build houses.

3. Demand has been rising for various reason:

Demographic factors - increased number of households.
Rising number of households due to more single people; e,g old people and higher divorce rates.
Rising immigration, especially from eastern europe, e.g. countries like Poland.
Foreign investors buying second houses as an investment.

4. People are willing to pay higher prices and borrow more.

New types of mortgages have enabled people to borrow higher income multiples

5. The price of renting has been increasing faster than inflation. Therefore, people might as well try to buy.

• House Price Crash in London?
• London Housing Market
• London Housing Market report by GLC - PDF format
  

London House Prices Rise 32% in 2006

London

According to estate agent Knight Frank, London House prices, in certain areas like Mayfair, rose by a record 32% last year. A significant reason for this, continued London House price boom, is the generous bonuses given to city workers. Another reason is the inflow of money from abroad; foreign investors are buying houses in London. In particular demand is rising from Russian and Arab investors. It is not just the likes of Roman Ambrovavich who have countless millions to spend.

Despite the rising demand, supply is still limited. Houses are being sold very quickly after being put on the market. There has been an increase in gazumping and sealed bid - features not seen since the late 1980s boom.

The effect of these 2 groups is that house prices are rising, even though many houses in London are beyond the reach of ordinary workers, such as nurses and teachers.

The average price of a house in London is now £322,108

House prices in the rest of the country continue to boom.

(1) House Prices London

Price of London's richest homes soars 31% in a year

Bumper City bonuses and an influx of foreign buyers are driving up house prices in London's smartest areas at the fastest rate for 28 years, a report showed yesterday.

Estate agent Knight Frank said the average price of million pound-plus homes in prime central London areas such as Belgravia, Mayfair and Chelsea leapt by 2.6 per cent in February alone to stand a staggering 31 per cent higher than a year earlier. That is the highest annual rate of increase since 1979, and is triple that for the UK as a whole.

The Gatehouse, a penthouse in Uxbridge Street, Notting Hill, is one example of how prices at the top end of the market have soared. It was on the market two and a half years ago for £4.5m and failed to sell. It was put back on the market two months ago and was quickly snapped up for £6m, above guide price.

Liam Bailey, Knight Frank's head of residential research, said prices continued to be pushed higher by a chronic lack of supply. And while big City bonuses were another factor, he said the biggest boost had come from an increasing number of wealthy overseas buyers, especially from Russia, Italy, France, and the Middle East.

"Our forecast that prices in prime central London will grow by 12 per cent this year could well be an underestimate," he said. "Prices have already moved higher by 5.6 per cent in the first two months of the year and we expect that the next two to three months will see the strong market conditions remaining."


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