The house price nightmare ‘hollowing out' London

Telegraph

01-06-2025

Tucked just behind the Victoria & Albert Museum, Kensington's Egerton Crescent is an elegant half-moon of handsome 19th-century terraces, their white facades and wrought-iron balconies overlooking a patch of private garden.
In the early part of last decade Egerton Crescent was dubbed 'Britain's most expensive street'. As London boomed, you could name your selling price if you were lucky enough to own a house here.
But things have changed in the capital. Coutts, the King's bankers, says 82pc of properties in 'prime London' sold for less than the asking price in the first three months of this year.
Land Registry records suggest prices in Kensington and Chelsea have dropped by 15pc in the past year, and Coutts says vendors are having to cop an average discount of 9.3pc.
'The market has changed dramatically,' says Christian Lock-Necrews, the head of the Kensington and Chelsea office at estate agency chain Winkworths. 'I've done this for 20 years, I'm long in the tooth. It's unquestionably a very difficult market, because buyers are hesitant.
'Clients can't bury their heads in the sand. It may be a difficult pill to swallow … Sometimes it's not a 2pc or 3pc drop, but a 10pc drop.'
Problems are not confined to the top end of the market. Average house prices in London are now growing more slowly than anywhere else in Britain.
Asking prices in London are only 0.7pc higher than a year ago, according to online property portal Rightmove. In North East England, they're up 2.8pc, and in the North West 3.9pc.
'The London housing market has been struggling for a decade, it's the laggard of the housing market,' says Richard Donnell, of online property portal Zoopla.
'It's really a tale of different migration patterns, affordability, uncertainty after Brexit. Then obviously the global pandemic came along and hit global cities pretty hard. Then in the last two years or so we've had higher mortgage rates – that has had the biggest impact where house prices are higher, and who's got twice the national average house price? That's London.'
As wages have stagnated, interest rates have climbed and the cost of living has soared, people have increasingly turned their backs on London for the more affordable accommodation on offer up north.
It's a long way from 2016, when house prices were growing at a double-digit pace at all points of the compass, from Barking to Hounslow, Croydon to Waltham Forest.
Now, the decades-old wealth creation machine that underpinned London has stalled. Owning a home in the capital used to be a way to get rich. Flip it when you retired and you'd have plenty to live off. That may no longer be the case as growth in prices slows to a crawl.
The big question is: is this the nadir before a bounce back, or has the miracle of London's property market ended for good?
London exodus
'London's greatest export at this minute is people who can't afford housing in London,' says Shaun Bailey, a Conservative member of both the House of Lords and the London Assembly.
'What we Londoners are doing, we're now popping up in other places in the country: Bristol, Bath, I've heard people go as far as Liverpool and Newquay. We are now pricing them out of their area.'
The exodus north can be seen in prices. Land Registry records show double-digit increases this past year in towns and regions dotted across the North – Durham, Hartlepool, Liverpool, Middlesbrough, Newcastle, Oldham, Sunderland.
Yet houses in these areas are still changing hands for an average of £200,000 or less, often not even a third of the average in most London boroughs.
Maddie Stewart-Williams, 27, is one of those Londoners who did the maths. After almost a decade in the capital, she and her partner moved to Liverpool from South Woodford, about 10 miles north-east of central London, last September.
They had bought their Woodford one-bedder – 'tiny, barely more than a studio' – in 2020 for £272,000, 'which at the time felt like a bargain'.
'I'm sat in my house now, a three-bedroom, two-bathroom terraced house in Liverpool, which is worth considerably less than what we paid for that flat,' she says.
Her partner was born and raised in Hackney, and they never planned to leave London. They looked for a bigger place in cheaper corners of the capital like Plumstead and Shooters Hill, but to no avail.
'The more we were looking at these areas and the costs of the houses there, I just kept saying to my partner, we could live in the nicest part of Nottinghamshire for the price of a three-bed in not-the-best area in south London,' Stewart-Williams says.
'We realised that if we were going to stay in London, it was going to be a big expenditure. Our mortgage was always going to be a big part of our salaries and our lives, and dictated what we could and couldn't do.'
The stats bear this out. In London, mortgage repayments average 57.9pc of take-home pay, according to Nationwide. In the north-west, it's just 27.5pc, and in the north-east, 22pc. The national average is 34.7pc.
Living in London has always been more expensive than in the rest of the country. But in the past young professionals had to stomach it if they wanted to build a career in finance, politics, professional services or other London-centred industries.
The ability to work remotely since the pandemic has changed all that, Bailey points out.
'Londoners who can arrange some kind of hybrid working, they can live very far away from London but they can have a London salary,' he says.
Stewart-Williams and her partner both work in the tech industry. Some of their work still revolves around London, but she doesn't need to be there. 'On a daily basis, we both say to each other how glad we are that we're out of London and how we would never go back'.
In some ways, this is a familiar British story.
'A lot of people move to London when they're young, they get generally better-than-averagely paid jobs. Then at some point they try to get on the housing ladder. There are lots of first-home buyers in London,' says Rob Houghton, chief executive and founder of reallymoving, an online property services marketplace.
'And then for a lot of them the second step will be to move out of London, whether it's to the outer region of London or right out of London together, which is what I did 30 years ago.'
Data from Hamptons estate agents shows that the London property market has the highest proportion of first-home buyers of any British region: at 50pc, it's 21 points higher than the national average. But ask any London-dweller under the age of 40 about buying in the capital, and the familiar refrain of despair and desperation will ensue.
'Two years ago, I was looking at property in London up to £280,000. So many places were either 'cash-buyer only', or 'short lease', or 'not suitable for mortgage' or even just mouldy. Anything cheaper than that was in Zone 7,' says web designer Nadia.
'Then I got a pay rise, and could afford £325,000. But the habitable flats were all those same ones, they'd just got more expensive.'
'More homes for sale than buyers'
Beneath this decades-old tale of despairing buyers, though, there is now a sense that something has changed.
As domestic middle-class buyers look to the North or give up, and as the cosmopolitan elite abandons London for Dubai or some other less taxing jurisdiction, London has become a nightmare for sellers, too.
'There are more properties on at the moment than there are buyers, that's for sure,' says Laura Dam Villena, of real estate adviser Cluttons.
Leonie Witte and her partner have had to learn this the hard way. They've been trying to offload a three-bedroom terrace with a garden in south-east London's Bromley neighbourhood for almost six months.
They first advertised it on the do-it-yourself website Purplebricks in late November with a price tag above £400,000. Would-be buyers began filing through and soon they had an offer. But then the script changed.
'That buyer pulled out. We then got another offer, from a family, but they pulled out after telling us they'd realised their preferred school wasn't nearby enough – even though they would've known that already,' Witte says.
The sellers dropped the price a couple of times. In March, there was a lot of interest from people frantically trying to find a place before the stamp duty threshold rose from £300,000 to £425,000.
'Once the stamp duty rules changed in April, it really dried up,' Witte says. Finally, after dropping the price below £400,000 and advertising more widely, they are hopeful they have found a serious buyer. 'We never thought it would take so long.'
London falling
Sales volumes in London have been in steady decline. From 8,030 transactions in January 2021, the figure this January was just 4,005, according to Land Registry records. The sharpest declines were in the swankiest locations, such as Westminster and Kensington and Chelsea.
On average, it costs £1.2m to buy a place in Kensington and Chelsea, and £900,000 in Westminster. But that's 15pc and 20pc less, respectively, than the same time last year.
Coutts says sellers face a 15pc haircut on their initial sale price in Mayfair and St James's, and 12.5pc in Knightsbridge and Belgravia.
The prime London market's astonishing growth in the first decade and a half of this century was at least partly fuelled by an influx of wealth from abroad – from Russia, China and the Middle East – attracted to the history, the prestige, the schools and the financial services the city had to offer.
'There was a period of time when purchasing a nice house in a very desirable part of London was a very good place to put your money, if you had quite a bit of it and you could put it pretty much anywhere in the world,' says Rob Anderson, research director at the Centre for London.
Since the Brexit referendum of 2016, however, London's appeal to the globe-trotting elite and its footloose capital has been slowly waning.
'There's always a geopolitical element to a lot of what's going on in the super-prime type [of] areas,' says Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors.
'There has been this sense, perhaps at the very top end, that perhaps London is not as welcoming a location for people as it once was.'
In the past year, the capital's star has fallen faster and further. Agents and analysts point to Rachel Reeves's decision, in her maiden Budget last October, to press on with the abolition of non-dom tax status, and to raise the stamp duty charged on international purchases from 5pc to 7pc, and on second homes from 3pc to 5pc.
Add those levies on to the 12pc top rate of stamp duty, and an overseas buyer's tax bill could easily top £100,000 in prime London. At a time of global uncertainty, that might be simply too much.
It is not just an unwillingness among buyers that is hurting the market. Many non-doms are trying to sell up after the change to their tax status, meaning the market is being squeezed from both sides.
'Prices [in prime central London] fell in the last quarter of last year by about 1.9pc [year on year], and in the first quarter of this year by 2.6pc,' says Lucian Cook, head of residential research at Savills.
'That is a direct response to what's gone on in the Budget.'
When the top of the market was booming, the locals who were priced out would shift to the next tier down, pushing prices up there as well.
Without that ripple effect, it's no surprise to see areas surrounding the prime boroughs are also slipping back: Hammersmith and Fulham house prices are down 13.2pc year on year, according to Land Registry data, while Islington is down 8.2pc, and Wandsworth 2.4pc.
'A hollowed-out city'
Across the rest of London, where all those first-home buyers are scrabbling to get a foothold, the biggest issue is not changes in tax status or geopolitics. It is affordability.
'What you might be seeing is just almost a topping-out of the market, almost reaching the limits of unaffordability,' says the Centre for London's Anderson. 'Are we reaching the top of what the market can take, basically, in what people are willing to pay for properties in London?'
According to Nationwide, the average cost of a London home is now 9.3 times the average salary. In the country at large, that figure is 5.8, and in the north of England it's as low as four or five.
'London is out of reach for so many people, even for people on really good incomes,' says Sem Moema, a Hackney councillor who is Labour's housing lead in the London Assembly.
She recalls meeting one of the borough police commanders for her constituency and being surprised to discover that he actually lived in London. Police officers, like nurses, teachers, and nursery workers, are being priced out of the areas where they work.
'It's a hollowing-out. It's a real, real problem, what it means for the shape and the feel of the city,' she says.
'Lots of boroughs are facing falling school enrolments, some are being forced to close school classes, because families can't afford to live in the capital.'
Recent falling interest rates have eased the pressure slightly. London's price-to-earnings ratio, which compares the average house price to the average annual earnings, has dipped from the high of about 11 in both 2016 and 2022, which seems to be the ceiling. But buyers won't necessarily be feeling better for it, says Rubinsohn.
'Interest rates at where we are now don't look absurd, in a historical context. But a lot of people who perhaps bought properties in 2021 or 2022 were doing so at almost zero-cost money, and it's a much harder game now,' he says.
'Deposits to actually fund a house purchase in London or a flat purchase are still substantial. Unless you're fortunate enough to be employed in consultancy, the legal world or financial services or tech, getting that deposit together is a real challenge.'
With buyers stretched close to financial breaking point, the stamp duty on a London purchase can make or break a deal.
It was little wonder, then, that the looming end to the most recent stamp duty holiday caused a mini-frenzy in the middle market. More than 75,000 buyers raced to seal deals before the tax break expired, driving a 104pc surge in house sales year on year according to HM Revenue and Customs data.
After April, the market fell 'into this kind of lethargic quiet', says Wendy Peterman, who runs an eponymous estate agency, founded by her father and uncle, in the well-to-do south London neighbourhood of Herne Hill.
'Now it's picked up a bit. We've seen a lot of stuff come to the market in the last week or so. Whether it's going to sell or not, I don't know.'
The pundits have varying views on how to fix the problem. Bailey wants banks to be permitted to lend more generously to young first-time buyers. Rightmove's Colleen Babcock suggests stamp duty should be varied by region, so that Londoners are penalised less.
Everybody talks about the need to increase the supply of houses. But the Government's target of building 88,000 new homes in London annually would equate to rolling out an entire new borough each year. The authorities didn't even hit that mark in the 1930s, when the 'Metro-land' suburbs were thrown up at the end of the new Underground lines.
Labour has vowed to 'get Britain building' and promised 1.5m new homes across the country by the end of this parliament.
However, the Office for Budget Responsibility's assessment of the National Planning Policy Framework, the building blueprint launched by ministers last year, concluded that the plan would only make London homes 0.8pc cheaper – perhaps a drop of £5,000 on average. And anyway, that wouldn't please the sellers, who also have a vote.
'To get London's house-price-to-income ratio down to the national average, you'd need to see prices fall by about a third over the next five years. Which no one wants. Any politician in their sane mind would think twice about that,' says Anderson at the Centre for London.
The other group of buyers leaving the London market are buy-to-let investors. Extra red tape and the Chancellor's stamp duty increase on second homes have prompted many to sell up, even as rental yields have increased.
New renters' rights laws, which would make it harder to evict tennants and are still moving through Parliament, are making landlords even more nervous.
'As it has gradually become harder and harder to make any money as an amateur landlord, I think the investor demand has fallen dramatically,' says reallymoving's Houghton.
'A lot of my friends had properties they rented out, and an awful lot are selling them off, us included. It became more hassle than it was worth, and we weren't really making any money out of it. I think that has changed the dynamics of the London property market.'
The lack of landlords hurts not only sellers, who might previously have sold to one, but renters. This spills over into London's economy, says Anderson. Fewer rental properties mean higher prices, leaving less money to spend elsewhere.
'You've got young professionals in the prime of their spending life, and one third to half their income is going on rent or a highly leveraged mortgage.'
New normal?
Affordability can hurt more than just the hipster's hip pocket – it sucks up time and capital. A study commissioned by the London Assembly last year estimated that a 1pc improvement in housing affordability generates a 0.14pc increase in the city's productivity.
On the other side of the ledger, there is a feedback loop between house prices and consumer confidence. Higher confidence drives higher prices, and vice versa. What the market takes from buyers and productivity, it gives to sellers and demand.
So far, the Starmer Government has little to show for its focus on housing. Ramping up supply will take time and money. In the short-term, that leaves Labour's tax changes as one of the dominant drivers – often through the law of unintended consequences.
Unsurprisingly, the people who make a living from the London market are hopeful that better times might yet lie ahead in the capital.
Cluttons' Villena says buyers are still there in peripheral parts of London, 'in the background'.
'I've been speaking with a number of buying agents recently, saying they have some really great clients lined up. But there's a sense of hesitation and waiting,' she says.
'It wouldn't surprise me if in the next quarter we look back and see a bit of recovery on prices in those areas. But we're not expecting any sudden influx of buyers. I think this will be the new normal for a while.'
Rightmove's Babcock says London is a microcosm of the country as a whole: where homes are more affordable, like Barking and Dagenham or Hillingdon, there is stronger growth. She is also seeing a rise in demand for office space, suggesting that London might once again draw workers in.
Back in Kensington, Lock-Necrews says some of his prospective clients feel the worst Budget news is all out of the way now. Others are rekindling their affection for London. They may not be in the market for a terrace on Egerton Crescent, but they are sniffing around.
'There are very positive conversations with people from across the globe who still perceive London as the place they want to be. So I feel quite reassured, actually – I think London's been talked down too much,' he says.
'Yes, it's different – prices have been adjusted, there are fewer buyers. Prices probably got out of control in central London, and they've readjusted since. But it is still London, nothing goes up in a straight line forever. And we've had an incredible run.'