I think London has gone pretty much as a far as it can go in terms of growth. We’ve seen places that have gone up 15 percent year-on-year and that just cannot continue happening. Admittedly you could have made that argument 12 months ago or even 20 years ago, but the market has now been stretched to such an extent that it’s very hard to see where more returns will come from. For example, Londoners are spending up to 70 percent of their take-home pay on rent. The market just cannot go much higher unless wages rise substantially.
The upshot is that there has been a shift in recent few months, where people aren’t willing to accept poor returns in order to get capital growth. In previous years the overseas market invested on the basis of London being a safe haven, but they now seem to realise that it’s impossible to get any kind of yield or return on investment.
This effect has been compounded by the recently announced changes to mortgage interest relief and stamp duty. The end result is that the more leveraged you are as a higher-rate taxpayer, which most investors will be, the more you’ll be giving away of your returns in tax.
These investors are now looking outside the metropolis. Most immediately, you’re see the ripple effect out to commuter zones, where there are still pockets of value. Places like Medway in Kent are being talked about, due to improved transport links. Luton is also well-located in terms of proximity to London. It’s perhaps not the most charming place in the world so it’s been left behind compared to other places within a commutable distance, but prices are rising.
But I do think you hit a point where you go so far out of London that you might as well invest in other cities.
I know Chinese investors are moving heavily into northern cities such as Manchester, Leeds and Liverpool. I can see Manchester in particular becoming the next London, in terms of prices going up to the point that it becomes untenable for people working in a normal job.
There are also places like Birmingham and Newcastle where employers are also relocating as they get very qualified people much cheaper because they aren’t having to pay London rents.
For investors, these cities offer potential gross yields getting up to eight or nine percent, which is way more than is possible in London. When you get beyond that you’re probably looking at properties that are cheap, and probably cheap for a reason. These are less desirable locations where there’s money to be made, and it works for some people, but if you are an overseas buyer looking for a hands-off investment, that’s probably not for you. So if you are getting into the seven- or eight-percent range then that’s pretty good.
I should emphasise that London is unlikely to crash. It’s like other international cities such as New York where you’ve got enormous demand but constrained supply, so prices are going to stay quite high. And if you’re looking for a place to live, rather than an investment, there are areas that offer more value because they are starting from a lower base. Tottenham, Elephant and Castle, Leyton, Croydon, Catford and Barking all have good transport links but are not yet as desirable as they will become in future.
The bigger picture is that London has had its aggressive growth early in the cycle and will grow less slowly than the rest of the country. We’re probably somewhere in the middle of the cycle now, going into a bit of a wobble, and then the rest of the country will have its aggressive growth phase.
Finally, a lot of investors are asking how the Brexit vote has changed the market. Obviously the weak pound has led to overseas interest. At the top end we’re seeing some lenders reconsider their criteria to limit exposure, as nobody really knows what the future holds.
But in the actual market itself we’re not seeing a great deal of change, aside from a little nervousness. There was an initial ‘let’s stop and see what happens’ mentality, but then everyone realised we could be years away from knowing what Brexit means, so we might as well just carry on as normal.
—
Rob Dix runs the Property Geek blog and is the co-founder of the Property Hub podcast, forum and magazine, the co-founder of Yellow Lettings. He’s the author of three bestselling property books and the director of LendSwift, a bridging finance company.
