London prices - how low can they go ?
According to Zoopla London house prices have reduced by 3% in the last year, it seems this is still on the decline. Over the last 6 months every property purchase transaction we have been involved with has gone for at least 5% below asking price. As a broker we have clients spread across the whole of London and the theme is common across the board. Although Londoners shouldn’t feel too hard done by considering they have enjoyed a 32% increase of the last 5 years, so it seems about time the property prices started to correct.
There were several factors for such a large rise, but no other factor bigger than the access to cheap lending and masses of it. On this upward trend it became increasingly easy for people to start using the equity they had amassed in their properties, whilst banks made it easier to borrow residential and buy to let mortgages. People were able to take this equity and purchase other properties which then helped fuel the sharp increase in prices. Borrowing became easier with the banks and the money started flowing again.
As everyone is quite aware the property market has been slow in London for the last few years and I believe this will continue for a little while yet. The main properties that will be affected by this decline will be flats within the London market. A year ago, landlords started to have their tax relief being taken away. Essentially landlords will only be able to offset lower tax band of interest payable, which is reducing by 25% each year up until 2021 when it will reduce to nil. Let’s run a scenario to see the increased cost. For a landlord that owns 4 properties and earns £50,000 a year which is common for London. We will assume each property is valued at £250,000 with a 50% LTV mortgage producing a rental income of £1500 each on an interest rate of 2%. In this scenario the client tax bill would have increased by £4,000.
Once this is paired with the additional 3% stamp duty a property investment soon becomes a lot less viable. It will take a lot longer to see your returns on property investment deals. What really hit the market is when the FCA brought in the new lending guidelines on buy to let properties 2 years ago. This stopped the free flow of buy to let lending to the market due to new affordability assessments and guidelines brought in. Now in London landlords can roughly borrow around 20% less than they could with the previous guidelines. This means it is a lot harder to release any equity to buy the onward purchase, and if you can manage to release equity the odds are that it is not enough for the deposit of the onward purchase.
With these 3 issues and the focus on building as many properties as possible I believe London flats will continue to see a decline. In a few years when landlords work out they could be paying more in tax then they receive with net income there could be a huge wave of old stock come to the market. This old stock will come to the market all around the time that a lot of new stock will come to the market from the new developments being built throughout London. With landlords having less access to buy to let mortgage lending, additional stamp duty, tax relief reducing, old stock and new stock coming to the market this could be a perfect storm for a sharp fall in flat prices in London leading up to 2021. They have already declined 6% against the overall decline of 3% and feel there is a lot more room for them to move even further, lets see how this rides out.
Need assistance with your mortgage?
Speak to one of our professionals today and understand how we can assist in finding the correct lending solution for you.Free initial consultation