Price changes in London’s housing market show signs of being “almost entirely dislocated” from the rate of wage growth, boosting affordability and potentially resulting in increased demand for housing in the coming years, according to new research by Savills.
In the capital, wages grew seven per cent between 2017-19, whereas house prices fell two per cent, increasing housing affordability. However, London prices remain almost twice as expensive compared to average earnings compared to the rest of the UK.
Savills estimated that prices across the UK were 10.7 times average earnings, but as high as 18 times in the capital.
Improving housing affordability
The continued improvements in London’s job market mean that wages continue to rise and outpace house price inflation, in contrast to 2015 – in that year, prices rose 11 per cent, but earnings grew just one per cent.
The turnaround in housing affordability reflects the stretched affordability of homes in previous years, but also the impact of policies such as the three per cent Stamp Duty surcharge on second homes, introduced in recent years, which disproportionately impacted the London housing market, according to Zoopla.
In addition to the Stamp Duty surcharge, London has been impacted by the fact that much of the demand for housing originates from overseas investors, whose investments in the market are highly sensitive to factors such as the performance of the global economy and movements in exchange rates worldwide.
Stable housing market in 2024
Savills looked ahead to the future, expecting that London house prices would grow 4 per cent by 2024, below the growth in earnings over the same period, boosting affordability further. This would come as good news for prospective buyers, at a time when the costs of buying remain significantly elevated, compared to other parts of the country.
Lawrence Bowles, senior research analyst at Savills, explained: “Our analysis shows that housing affordability in London is far more stretched than in any other region, leading to extremely high deposit requirements and higher loan-to-income borrowing.”
Mr Bowles concluded: “Any further house price inflation across the mainstream market will rely on that affordability pressure easing as earnings rise.”
The easing in London house prices relative to earnings is expected to result in increasing numbers of transactions, according to Savills, as prospective buyers see increased chances of making a purchase.
London’s prime property market, in which prices are significantly higher, is expected to continue enjoying strong price growth, as it is less related to changes in earnings. Prices in Central London are projected to increase as much as 20.5 per cent during the five-year forecast period.