“There is little doubt that the recovery in the housing market is now firmly established, with activity levels picking up and house prices recording their fifteenth successive monthly increase in March."
But the national figures conceal wide regional house price disparities. All areas in the UK have experienced rising house prices, but some more than others.
London house prices continue to soar, sparking concerns of an impending property bubble in the capital.
According to Nationwide during the year to Q1 2014:
- Biggest gainers were London, with house prices rising 18.2% y-o-y in Q1 2014, Outer Metropolitan Area around the capital (10.6%), Outer South East (10.1%), and East Anglia (9.5%)
- Lowest gainers were the North (5.9%), Northern Ireland (5.4%) and Wales (5.2%)
Residential property transactions rose by 15.1% in 2013 from the previous year, according to UK HM Revenue and Customs. The number of units sold in the fourth quarter of 2013 - at 315,720 units - was the highest since the last quarter of 2007. In 2013 the number of mortgages in arrears (10% or more of outstanding balance) dropped by 1.7% to 28,700, according to the Council of Mortgage Lenders (CML). Repossessions fell 14.7% y-o-y to 28,900, the lowest since 2007.
UK house prices are being boosted by four factors:
- Immigration and population growth have been strong, especially in London.
- Interest rates have been at record lows, with a large expansion of the money supply through “quantitative easing”.
- The City of London (London’s financial centre) continues to boom.
- Construction activity remains weak. Dwelling starts fell 4.7% y-o-y to 127,680 units in 2013. Dwelling completions fell 4.5% y-o-y to 139,350 units, according to UK’s Development for Communities and Local Government.
“The upturn in the supply side of the market continues to lag far behind, with the number of new homes being built in England still around 40% below pre-crisis levels (and this was already insufficient to keep up with the increase in the number of households being formed)”, says Nationwide's Gardner.
Analysis of United Kingdom Residential Property Market »
Prices per square metre (sq.m.) of apartments in Prime Central London (PCL) range from GBP 16,800 to GBP 25,000, with bigger apartments tending to cost more.
A 120-sq.m. apartment costs on average GBP 2,500,000
A 250-sq.m. apartment in Prime Central London costs around GBP 6,200,000.
Monthly rents per sq. m. range from around GBP 51 to GBP 64. This means that a 120-sq.m. apartment lets for around GBP 6,600 per month, while a 250-sq.m. apartment rents out for around GBP 16,000 per month. As a reminder, these are not typical London rents - this is Prime Central London.
Average square metre prices in the other luxurious areas of London range from around GBP 14,700 to GBP 19,000. A 120-sq.m. apartment here costs on average, GBP 18,800 per sq. m. or about GBP 2,250,000 to buy. Monthly rents per sq. m. range from around GBP 41 to GBP 44. Even so, a 120-sq.m. apartment in these areas can typical rent for around GBP 5,000 per month.
In Prime Central London, rental yields range 3.08% to 3.65%, whereas in the other luxurious areas of London, rental yields range from 2.72% to 3.20%.
However these figures may be somewhat misleading. because of London's size and its position as a global centre, its flavour-of-the-month quality with Russian, Middle Eastern and Chinese buyers, neither of these two central London zones that we cover are truly representative.
If you look the sources of the data in our table, you will see that some of these 'other luxurious areas' are very luxurious indeed. South Kensington for example is placed here.
A possibly more realistic impression is given by the figures from Association of Registered Letting Agents (ARLA), which suggest that gross rental yields in Prime Central London are 4.37%. Arla's estimated yields in the rest of London are 4.74%. These estimates are taken from a database of active buy-to-let landlords, and are likely to represent a good assessment of the real situation.
Foreign residential property investors in Britain face a rising rumble of dicontent from the British public about exorbitant housing prices in London, which rightly or wrongly is partly blamed on the large numbers of foreign buyers, as well as the continuous flow of immigrants into London. Both are hot-button issues.
One result is that foreign buyers will soon be liable to capital gains taxes when they sell their UK properties (previously they were exempt). Another is that stamp duty has been ramped up on higher-end properties. There is talk of further measures - it is widely agreed that Council Tax is too low on high-end properties, and the Liberal Democrats have been agitating for a mansion tax.
Round trip transaction costs are higher in the UK now than they were in the past, especially in London given higher stamp duties on expensive properties. See our UK residential property transaction costs analysis and our Residential property transaction costs in UK compared to other countries.
Capital Gains: Capital gains are taxed are taxed at progressive rates, from 18% to 28%.
Inheritance: Estates or assets exceeding the current tax threshold of £325,000 (€371,429) are subject to inheritance tax at 40%. In calculating the amount of the estate, the value of any gifts made by the deceased within 7 years of death must be added (some small gifts are exempt).
Residents: UK residents are taxed on their worldwide income and on capital gains from disposal of their UK assets, and most likely on their overseas properties too.
Tenant Security: Contracts naturally revert to a standard monthly contract which, after an initial six month's period of security of tenure, allows the tenant to be evicted at two months' notice. However in practice the eviction process can disadvantage the landlord.
“I think it's fair to say that our forecast was too pessimistic. Part of our job is to ... warn when we see risks. Now fortunately, most risks don't materialize. And this was again a case in which it didn't,” said IMF chief economist Olivier Blanchard. The IMF originally estimated the UK economy to grow 1.9% in 2014, raised the forecast to 2.4%, and just recently increased it again. UK's GDP growth, according to IMF, would soar to 2.9% this year before returning to its long-term trend of 2.5% in 2015.
The IMF says that growth has rebounded more strongly than predicted primarily due to easier credit conditions and increased confidence. But it warned that the recovery relied too heavily on easy credit and that the recovery has been unbalanced, with business investment and exports still weak.
The IMF's forecast was supported by the latest UK economic data, which showed
UK manufacturing output grew by 1% in February from January, according to the Office for National Statistics (ONS).
The growth was driven by pharmaceuticals, transport equipment, food, beverages and tobacco. The year-on-year figure saw output 3.8% higher than in the same month of 2013, the strongest in three years.
The National Institute of Economic and Social Research (NIESR) said that UK growth in the first part of 2014 had been “robust”, and estimated that UK output grew by 0.9% in the three months ending in March.
The UK economy grew 1.76% in 2013, an improvement from 2012’s growth of 0.25%; and is now expected to steam ahead as consumer spending rebounds, inflation remains low at around 2% and unemployment continues to fall steadily.