With British buyers joining foreign investors in London's property frenzy, even outer areas are becoming unaffordable hotspots
Nestling in the shadow of the defunct 1930s leviathan that is Battersea power station, the 1,200 gleaming glass and metal apartments that comprise Chelsea Bridge Wharf in central London could not look more contemporary. Overlooking the Thames, barely a mile from the King's Road, next to a glorious park, it is an enviable location many thrusting professionals would be happy to call home.
But living at such an address carries a hefty price tag. A one-bedroom 463 sq ft (43 sq m) apartment with a small balcony is yours for half a million pounds. Yours, that is, if you move quickly. Such properties tend not to hang around for long, as few come on to the market.
Agents estimate that about 60% of homes in the development were bought by overseas buyers when they came on to the market a few years ago. Of the ones that went to international buyers, three quarters were bought as investments to be rented out.
In the crazy world of London property prices, paying more than £1,000 a square foot barely raises an eyebrow. London's residential property market is booming and prices are now way above where they were before Northern Rock imploded in 2008. It can't continue, say the doom-mongers. Yes it can, reply the bulls.
The boom – some say the "bubble" – has created its own citadel. Estate agents talk enthusiastically about "PCL" – prime central London – those parts of the capital where properties normally sell for more than £1m. Prices in this area are now 18% above where they were before the 2008 pre-crash peak. Buyers are falling over themselves to snap up properties. Viewings in prime central London are up by 15% compared with the previous year. The number of properties sold has increased by more than 8%.
Already in one borough, Kensington and Chelsea, the average price of a home is now above £1m. Several other boroughs, including Hammersmith and Fulham, Westminster and Camden, are not far behind. Figures from the Office for National Statistics, out this week, are expected to confirm that prices continue to rise steadily.
Meanwhile prices in the "super prime" segment of the market – properties valued above £10m – are also sharply increasing. Having fallen 20% after the 2008 crash, they are now 10% above the pre-crash peak. "The higher the value of a property [before the crash] the more it's gone up," said Richard Donnell, director of research at Hometrack, a property analysis company. It's almost as if the Lehman collapse never happened.
The influx of foreign buyers has been a key driver in pushing up prices. Between 2010 and 2011 many overseas investors, fearing the consequences if Greece were to quit the eurozone, bought up prime London real estate as a defensive measure, a hedge against falling prices elsewhere. Research published by upmarket estate agent Knight Frank suggests that 53% of PCL properties that sold for more than £2m in the 12 months to March of this year went to overseas buyers. Residents in the euro area countries accounted for 10% of the purchases. Investors from the "rouble bloc" came in a close second, at 9%.
Further up the value chain, foreign buyers become even more dominant, with the proportion of PCL properties worth more than £5m sold to non-UK nationals now close to 60%.
This "flight to quality" has exacerbated the huge difference in price between London and the rest of the country. Fathom Consulting, which provides economic analysis, estimates that a typical property in prime central London was worth just under £1.5m in the first quarter of 2013, compared with a little over £220,000 elsewhere for the UK as a whole. Unusually, though, the rise in prices since foreign buyers started buying up vast numbers of PCL properties in 2010 had been slow to filter across the rest of London.
"Central London usually leads the UK out of a downturn," said Liam Bailey, head of residential research at Knight Frank. "There's a ripple effect going outwards. But it didn't happen this time."
Until now. The majority of buyers now entering the London market are no longer from abroad, as confidence returns among British buyers. The relative strength of the share market has brought renewed optimism and there is an emerging view that the capital has emerged from the storm.
Other factors are playing a part. Government initiatives such as Help to Buy, which allows people with deposits of as little as 5% to buy properties worth up to £600,000, are helping to drive prices upwards. So, too, are low interest rates that make the cost of borrowing significantly cheaper. Signals last week from the new Bank of England governor, Mark Carney, that interest rates will continue to remain low until after the 2015 election will do little to dampen the bullish mood. Estate agents have been surprised by the buying frenzy. Knight Frank had forecast that prices in the PCL post codes would remain largely unchanged for 2013. Now it predicts they will grow by 6%.
Significantly, the rate of increase is now rising faster in London's outer boroughs than in the PCL postcodes, where they are showing signs of slowing. Prices in Kensington and Chelsea, for example, rose 12.2% in the 12 months to June 2012, but only by 9.5% in the year to June 2013. In contrast, growth in greater London in the year to June 2013 was 6.9% compared with 6.4% the previous year.
The ripple effect is spreading to some unlikely areas. In the 12 months to June 2012, prices in Dagenham fell 1.1%, according to Land Registry figures. In the 12 months to June this year they have risen 7.5%.
Research by Hometrack shared with the Observer suggests that some outer areas have become hotspots. Top-performing postcodes include the leafy streets of Barnes and Herne Hill, where prices have risen more than 50% since their post-2008 trough. New Cross has also seen prices rise more than 50%, thanks to improved transport links.
Is this a property bubble?
"My own view is that it isn't a bubble," Bailey said. "It's about demand. London is arguably the most dynamic place in Europe and people want to live here. It's an issue of supply. Supply is rising, but London has historically been undersupplied." Analysts at Fathom Consulting are more sceptical. They note that the euro has strengthened in value as fears of the eurozone's imminent implosion have eased. As a result, London's position as a safe haven is no longer so important. "The risk now is that a portion of those safe-haven flows that took place through 2010 and 2011, and were associated with fears about a breakup of the single currency, start to unwind," Fathom says. "In the event that these fears disappear completely, PCL prices could fall by around 10%."
History suggests that this drop would then ripple across the rest of London. But even if such a fall were to happen, it would mean nothing to the millions of people struggling to get on London's property ladder.
In March last year a study by the housing charity Shelter found that 65% of non-home-owning Londoners expected that they would never be able to buy a home in their local area. The typical deposit needed for a first-time buyer in London was estimated at more than £84,000. Nearly a quarter of London households – 700,000 – were renting from private landlords, up from 15% (445,000) a decade ago. Since then, prices in London have continued to soar.
Priced out of central London, many families cannot afford to live anywhere in the capital. Instead they move out, pushing prices up elsewhere.
"Every rise in house prices means thousands of pounds piled on to the cost of the average home, and a generation increasingly stuck in unstable private renting while their dream of home ownership drifts further out of reach," said Campbell Robb, chief executive of Shelter.
Or, to put it another way: what happens in London doesn't stay in London. The capital's property boom has dire consequences for the whole of the UK.
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