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London house prices under strain from lacklustre city employment figures

According to the Chesterton Humberts Poll of Polls, London house prices have fallen by 1.0% in the fourth quarter of 2011 compared to the previous quarter. This puts the current London house price average at £342,286 in December, which is around 2.5% higher than the same month last year. 

As the figure below illustrates, annual price growth in London has slowed to 2.5% in 2011 after rebounding by 10.3% in 2010. This ‘below-trend’ growth in house prices is partly explained by a net loss of 26,800 city jobs in 2011 – representing a 8.5% annual fall in city employment. Lower numbers of city jobs ultimately means lower demand for house prices – and at the same time bankers’ bonuses (which are traditionally invested in property) have fallen by £0.5 billion (from £7.3 billion in 2010/11). 

A stagnant mortgage market and weak economic growth in the economy have kept a lid on house price growth throughout 2011. The total level of mortgage approvals from January to November 2011 equalled 544,072 – 2.1% lower than the same period a year earlier.

Year-on-year, house prices have fallen by 0.9% in December, which is still marginally better than the 1.2% fall reported in the previous month. This is owing to better economic conditions in December 2011 compared to the same month last year – when freezing conditions gripped the UK and stalled growth. 

December’s better than expected services sector performance suggests that the UK will narrowly avoid contraction in Q3 2011. Furthermore, falling consumer price inflation since September 2011 has also relieved the squeeze on real disposable incomes, increasing mortgage affordability and supporting demand.

Despite conditions improving in the short term, the housing market remains in a state of fragility. Furthermore, house prices are falling month-on-month across all regions including London, where reduced bankers bonuses and weak financial services activity has stymied house price growth.

Robert Bartlett, Chesterton Humberts’ CEO, comments:

“The possibility of a ‘Eurogeddon’ continues to impact the prime central London market.  We are seeing an influx of Eurozone buyers seeking steady yields and low volatility but there is very little stock available.  Many are investors seeking buy-to-let properties in the £500,000 to £2.5mn range which will rent to professional and corporate couples and families or high net worth students.

“However, properties in prime areas that are owned by international investors tend to be held for the long term and they currently have no incentive to sell, even to upgrade, so little is coming onto the market.

“The lack of transactions is likely to be the one factor that ensures some growth in the London market in 2012. Demand is still fuelled by the number of international investors who continue to regard London as the safe-haven of choice. The lack of stock is causing asking prices to rise as agents attempt to outbid each other to win instructions. The danger, of course, is that vendors become unrealistic in their expectations and market stagnation follows which is exactly the situation within the Country House market.”

Douglas McWilliams, Chief Executive of CEBR, comments:

“This month’s Chesterton Humberts Poll of Polls shows that while London may have some buffer against the public sector spending cuts, it is by no means insulated from the Eurozone sovereign debt crisis across the channel. Our research shows house prices in the capital are experiencing a sticky patch at the moment as both City bonuses and jobs are on a downward trend. This is likely to impact confidence in the market, although London house prices are still slightly higher than last year when adverse and snowy weather derailed economic growth.”

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