The rapid growth in property prices in London will be limited by high prices and difficulties in the lending

Too high prices for residential property in London will limit further price growth over the next five years.

The luxury real estate company Savills has published its report on the markets of England for 2014. According to the report , the gross value of residential property in London increased by £247 billion in 2014 – a 20% increase for the year. For comparison, over the previous 5 years, the total increase in the value of the residential sector of London was 61% or £563 billion.

The apparent significant disparity in the growth of house prices in London compared to other regions of the UK. Therefore, in the next 5 years, this imbalance will even out and it is expected that the rest of the UK, the average price increase will be 19.3 per cent, while in London prices will be 10.4%.

Savills experts believe that the new , stricter rules for mortgage lending is the primary factor which will limit price growth in the coming years.

So, in 2013, the average buyer earning £53000 per year could get a mortgage on a housing cost of £264000 lbs according to the standard ratio of the value of the loan (which is 75% of the property value) to the value of the annual income of 3.73. On average a borrower paid for the loan 20% of their income.

For 2014, the income of Britons increased by roughly 4%. But the growth of housing prices was much larger, which significantly reduced purchasing power. A particularly significant gap between income growth and the price growth happened in London. The average flat in London, which cost £264000, now worth £320000. This means that , even with the revenue growth, the buyer must obtain a loan of £46000 more.

Even if we assume that the loan will be allocated to the servicing of such loan will cost the buyer 26% of their income.

In fact, the financial position of standard borrower returned to pre-crisis times.

Presumably in 2019, the gap between the growth rates of housing prices and wage growth will increase even more and the size of the loan will be for more than 4 years of wages. In this case, the magnitude of the financial burden to service such a loan will increase to 29%.

However, in London there is still a shortage of new residential properties for sale. Of the required capital of 50,000 new residential units are built each year almost half. And this will be the main factor that prevents prices to fall.

© Alice Morgan G. 19.02.2015

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