Global Property Guide

Financial Information for Residential Property Buyers

Gap between London and rest of UK, widest it’s ever been

Last Updated: April 15, 2014

 United Kingdom house prices

The UK´s property market has continued to strengthen, with the economy recovering and interest rates at their lowest-ever.  "Viewed in annual terms, price growth is continuing to run at a robust pace, with the price of a typical home 9.5% higher than in March 2013”, said Robert Gardner, Nationwide’s chief economist.

“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.

The UK economy grew 1.76% in 2013, an improvement from 2012’s growth of 0.25%.  It is now expected to steam ahead as consumer spending rebounds, inflation remains low at around 2% and unemployment continues to fall.

Housing Boom and Bust

UK property prices saw huge rises from 1996 to 2007:

  • Prices in London rose 289% (229% in real terms) during this period. 
  • Prices in Northern Ireland rose by 393.2% from Q3 1996 to Q3 2007 (316.4% in real terms), the highest rise among all the UK regions
  • Price increases in other regions during this period ranged from 188% (143% in real terms) for Scotland, to 245% (192% real) for the Outer Metropolitan Area.
  • The national index rose 241% (188% in real terms) over the same period (all figures from Nationwide).

United Kingdom average house price

In early 2007 interest rates were raised, and lending conditions tightened.

House price falls accelerated in H2-2008, due to the global financial meltdown and the economic recession. The collapse of Iceland’s banking system led to substantial losses for around 250,000 British depositors, exacerbating the situation.  The regions that experienced the highest price rises during the boom generally had the biggest price falls from Q3 2007 to Q1 2009.

The biggest drop occurred in Northern Ireland where house prices fell by 39.2% (-42% real). House price falls in other regions ranged from 14.1% (-17.9% real) for Scotland, to 22% (-25% real) in East Anglia.  London house prices dropped by 19.8% (-23% in real terms).

London surging way ahead of rest of UK

The average home in London is now worth around 120% more (in Q1 2014) than the average home outside the capital, with the difference approaching £200,000 (US$334,920), according to Nationwide. The capital´s surge is being driven first-time buyers, and by foreign investors - rather than home movers.

United Kingdom london home comparison

The gap between London and the rest of UK is the widest it has ever been, both in cash and percentage terms. Although London prices have always been higher than elsewhere, the gap was less than 40% before 1995.

London prices increasingly diverged in the 2000s, accelerating sharply in the years after the financial and eurozone crises in 2008-2009.  London prices increased 18.2% y-o-y to £362,700 (US$607,377) in Q1 2014, around twice the rate of price increases in the wider market, according to Nationwide. The next fastest rising area is Outer Metropolitan London, at 10.6%.

London´s average house price is now 19% higher than at its peak in 2007, at £303,739 (US$508,641). Only two other regions are higher than their 2007 peak values: Outer Metropolitan London, which is 5.7% higher than in 2007, and the Outer South East, which is 1% higher than in 2007.  Both regions are evidently benefitting from London’s ripple effect.

All other regions remain below their 2007 values, with Northern Ireland performing the worst, with prices almost 50% below its 2007 peak.

“People are becoming priced out of London and the South East as affordability is stretched," ,” said Lucian Cook, head of residential research at Savills. "There are political issues around this as it becomes too expensive to attract some workers, impacting the capital’s ability to do business. But on the other hand, it is also a catalyst to drive employees and businesses to other major cities, rebalancing the regional economies."

Help-to-Buy Scheme

Help to Buy is a series of Government schemes to help homebuyers acquire homes. Assistance is provided through either an equity loan or a mortgage guarantee.

Through the Help to Buy Equity Loan, the government will loan homebuyers up to 20% of the full purchase price of a new-build property, provided that borrowers contribute 5% of the property price as deposit, and secure a mortgage for the remaining 75% of a property. The homebuyer is not allowed to sub-let the property and it must also be his/her only property.

The Help to Buy Equity Loan was initially intended to run until March 31, 2016, but has been extended until 2020, according to the Financial TImes.

The Help to Buy Mortgage Guarantee lets the borrower buy a newly-built home or an existing property with a deposit of 5% of the purchase price. It is open to both first-time buyers and home movers for homes with purchase price up to £600,000 (US$ 1,004,760). The homebuyer is, again, not allowed to sub-let the property and it must not be his/her second home.

Help to Buy Mortgage Guarantee is due to run until December 2016.

Help to Buy has encouraged a wave of fresh entries into the property market by people who previously struggled to buy homes.

Criticisms of the Help to Buy Equity Loan have been muted because it is directly linked to the supply of new homes. But critics of the Mortgage Guarantee have argued that the scheme is putting upward pressure on house prices.

But Grenville Turner, chief executive of property firm Countrywide, contends "Claims that the Help to Buy scheme is causing a housing bubble are far from the truth and the facts speak for themselves.

"As a proportion of transactions both parts of Help to Buy together support only 2% of transactions in London compared with 10% in the north-west, where support is most needed. The scheme has had a positive impact on house builder confidence with many now believing that they can sell what they build, which as we know means they will build more."

The first 10 months of the Help to Buy Equity Loan scheme saw 14,823 new properties bought through the scheme, mostly first time buyers. A further 4,666 new homes have been reserved. This means that 1 in 5 (19%) of all private dwellings built in England are being sold through the scheme, according to Countrywide´s Quarterly Market Review. In some more depressed housing market areas, almost 50% was bought through the scheme. Particularly in the North East, where house prices remain well below 2007 levels, house builders have relied heavily on the Help to Buy Equity Loan scheme to sell houses.

“Up to a third of some house builders´ order books are composed of homebuyers using the Help to Buy Equity Loan scheme to buy their new home. This highlights the extent to which the scheme is supporting new house building, and the reliance of developers on it outside London and the South East to achieve sales,” according to Countrywide.

Historic low key rate remains unchanged

United Kingdom interest mortgage

The Bank of England’s (BoE) key rate has remained unchanged at 0.5% for the past four years -  the lowest rate in the BoE’s history. 

From 2002 to 2006, the key rate fluctuated from 3.5% to 5%. In 2007, it was raised three 25 basis point steps to 5.75% in July 2007. Then came the crisis, and in November 2008 the BoE had the biggest rate cut in its modern history, with the key rate slashed 1.5 percentage points to 3%.

Mortgage interest rates have not tracked the BoE’s key interest rate down fully.  Mortgage interest rates started to inch downward in mid-2008, but the spread between the key rate, and the average mortgage rate, has widened to around 3 – 5 percentage points, from less than one percent in 2006 - 2008.

In March 2014, average interest rates for types of mortgages with 75% loan to value (LTV) were:

  • 2.37% for 2-year fixed rate mortgages (FRMs)
  • 2.97% for 3-year FRMs
  • 3.47% for 5-year FRMs
  • 2.83% for tracker mortgages
  • 4.43% for SVR mortgages

Rates or the bond-buying measure have not changed despite recent evidence that the UK economy is recovering.

The UK´s inflation rate fell to 1.76% in February 2014, a four-year low and below the Bank´s target of 2%. This has reduced any pressure on the Bank to increase rates. The Bank England has signaled the second quarter of next year as the most likely time for a rate hike.

First time buyers driving UK mortgage market

The first time buyer incentives have been vital.  Gross mortgage lending for the first quarter of this year was 37% up on the first quarter of 2013 at £33.8 billion, according to the Council of Mortgage Lenders (CML), the highest level since 2007.  These loans also helped other buyers move up the housing ladder. Loans to home movers were up 25% on the year, and loans for remortgages were up 16% year on year.

United Kingdom lending approvals

"Lending to first-time buyers and home movers has continued its upward trend and this, coupled with the growth in remortgage and buy-to-let activity, would suggest that all parts of the market are open for business,” said CML director general Paul Smee.

The Intermediary Mortgage Lenders Association´s (IMLA) executive director Peter Williams added:  “Buyers’ pessimism during the downturn has largely been shaken off and the outlook for 2014 is much more positive, but we are only just setting out on the path to recovery. The first time buyer market has long needed urgent attention, so it is encouraging that numbers continued to rise in December.”

Property transactions climbing fast

United Kingdom property transactions

Residential property transaction completions with value £40,000 (US$66,940) or above were up 42.9% during the year to January 2014, according to HM Revenue and Customs. This is the highest y-o-y increase since December 2009.  A total of 1,073,100 property transactions were completed in 2013, up 15% y-o-y and representing the highest level since 2007.


Number of transactions Annual change (%)
  January 2014 February 2014 January 2014 February 2014
England 76,890 74,400 42.57 32.74
Scotland 6,620 5,710 43.60 30.66
Wales 3,400 3,320 45.30 23.88
Northern Ireland 1,690 1,520 52.25 29.91
UK 88,600 84,950 42.93 32.18
Source: HM Revenue & Customs

 “January 2014 saw the highest level of demand with 13 buyers chasing each new property coming on the market. In London, the figure was much higher with 25 buyers for every new property, an increase from an average of 11 as recently as July 2013. However, towards the end of the first quarter in March, there were signs that demand eased off slightly as the market slowed to draw breath, but a shortage of stock in many areas remains, especially in London where the number of properties on the market has fallen 20% year-on-year,” according to Countrywide.

Respondents of the RICS March Residential Market Survey sold on average of 22.7 homes in the three months to March, the highest amount since February 2008. This latest increase in transactions comes at a time when the market is showing greater signs of life right across the country.

2014 not a good time to buy to let?

As a consequence of the recession, the private rented sector grew strongly, primarily at the cost of homeownership. However, during the year to March 2014, average monthly rents in the UK increased 3% (just tracking the rate of inflation) as demand was transferred into the sale market.

London registered the largest annual growth in average monthly rents as strong job creation figures boosted demand both locally and from abroad. Average monthly rents have closely followed wages and inflation across the rest of UK. Some tenants have seen their rents fall in real terms. Landlords across some parts of the country saw their yields decline as house price growth exceeded growth in rents.


Q1 2014
Q4 0213
Q1 2013
March 2014 y-o-y (%)
Greater London £1,156 £1,146 £1,107 4.4
Central London £2,509 £2,447 £2,387 5.1
East of England £832 £829 £814 2.2
South East £1,080 £1,087 £1,054 2.5
South West £752 £755 £745 0.9
Midlands £637 £644 £636 0.2
North £614 £619 £603 1.8
Scotland £631 £633 £580 8.8
Wales £638 £638 £618 3.2
Total £863 £860 £835 3.0
Source: Countrywide

The number of people letting out properties because they have been unable to sell has dropped to a record low, according to the Association of Residential Letting Agents (ARLA).

Only 13% of surveyed letting agents by the ARLA believe that they will see an increase in rental properties entering the market because they cannot be sold. This figure represents the fourth consecutive fall, and is far below the 94% high recorded when the question was first asked at the start of 2009, during the post credit crunch property crisis.

Low housebuilding activity

The UK’s per capita housebuilding rate is low by international standards, and failed to respond to booming house prices during the boom, due to building regulations and planning constraints.  The situation improved during the later years of the boom, but output declined again during the recession. Ironically, this has prevented the housing market suffering a large overhang of properties, a fate shared both by Ireland and Spain.

Increases in population, immigration, and changes in household sizes have all added to the pressure.  Despite rapid rise in house prices between 1996 and 2002, housebuilding actually fell during this period. The amount of available land for housebuilding, and the long processing time for development permits, both discourage new building.

A reform of the planning system, relying on local initiatives, is under way to speed the system up and expand the housing supply.  Extra funding for local government, depending on the number of new local home units built, is available.

However, the government’s budget constraints are putting all this under threat.

The government is targeting around 240,000 new dwellings annually until 2020. However, the target seems unrealistic, since output over the past 20 years has been around 150,000 dwellings annually. RICS therefore suggests that the long-term outlook inevitably involves severe housing shortages and increasing house prices.

In a discussion paper published in September 2009 by the Town and Country Planning Association (TCPA), researchers warned that at least 250,000 new homes must be built annually to match population growth, to replace the ageing housing stock and the accumulated backlog. Their analysis suggested that the housing deficit had reached one million by the end of 2010.

Homebuilding stagnated at an average of 186,000 new units annually between 1991 and 2003, and from 2004 onwards barely exceeded 200,000 annually (222,490 in 2007).  In 2008, the credit crunch combined with falling house prices reduced house building, and less than 100,000 completions took place in 2009.

In 2013, a total of 127,680 houses were started in UK, an annual decrease of 4.7%. The number of homes completed also dropped 4.5% to 139,350 in 2013, according to the Department for Communities and Local Government (DCLG). This is still below the peak reached before the 2008 financial crisis and is well below the estimated demand requirement of 250,000 new homes a year.

“These figures are further confirmation that we are nowhere near tackling our national housing crisis, which means that millions of people are being denied access to a decent home at a price they can afford,” said Chartered Institute of Housing´s chief executive, Grainia Long.

UK will be G7’s fastest-growing economy in 2014

United Kingdom gdp unemployment

The UK´s GDP growth, according to IMF, will soar to 2.9% this year before returning to its long-term trend of 2.5% in 2015. The IMF originally estimated the UK economy would grow 1.9% in 2014, then raised the forecast to 2.4%, and just recently increased it again.  The year-on-year figure saw UK manufacturing output 3.8% higher than in the same month of 2013, the strongest in three years, according to the Office for National Statistics (ONS).

“I think it´s fair to say that our forecast was too pessimistic,” said IMF chief economist Olivier Blanchard. "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 did not."

But the IMF has warned that the recovery relies too heavily on easy credit and that the recovery has been unbalanced, with business investment and exports still weak.


Old Entries


Be the first to comment on this article!

Login or Register to submit a comment!
In order to promote open and spam-free conversations, Global Property Guide moderates commetns on all articles. You can expect that your comment will be published within 24 hours.