Thursday 7 April 2016 9:19 am

Six reasons why London's property market won't collapse this year

A recent report by UBS argued that London’s property market in London is exposed to the world's highest bubble risk and many would agree. 

But the reality is there are several good reasons why prices won't fall anytime soon. Here are just six. 

1. Population growth

London’s population grows faster than the UK national average and the supply of new houses and apartments. By 2025, the population should hit 9.5 million and 11.3 million by 2050.

Read more: Where will London's population explosion take place?

To meet growing demand, 40,000–50,000 new homes need to be built each year according to JLL, even though only 24,000 new lodgings are planned each year between now and 2020. So until construction picks up, London is looking at even more acute shortages.

2. Unfulfilled construction potential

The population density in central London (55 inhabitants per hectare) is lower than that of many European capitals like Madrid and Paris (286 and 213 inhabitants/ha respectively). 

According to Savills, the British capital has room for another 1.4 million new homes – approximately one million more than the Greater London Authority (GLA) has planned for over the next decade.

3. Dwindling vacancy rates

Only 1.4 per cent of London homes are not permanent dwellings and vacancy rates fell 150 per cent between 2004 and 2014, even in the city’s upmarket districts.

It’s true that very central and expensive areas have more empty homes (24.6 per cent in the City, nine per cent in Kensington and Chelsea and 5.5 per cent in Westminster), but this is mainly because yields on prime residential rentals are too low to be worth it (average 2.9 per cent annual yields).

4. Affordable housing initiatives

Property may not be “affordable” but cheaper credit, lower interest rates and government programmes are enticing people to buy.

The help to buy programme supports new house purchases up to £600,000 in London with 40 per cent financed by the government (no interest for five years). This preferential rate means that a buyer can make a five per cent deposit and get a mortgage for the remaining 55 per cent.

Another programme, Starter Homes, grants a discount of at least 20 per cent off the price for first-time buyers under 40. 

Plus, there's the Lifetime Isa – yet to be tested, but another part of the government's efforts to keep the property market moving. 

Read more: The fried chicken guide to house prices

5. Tempered price growth

House prices in London were twice the UK average by 2013 and 20 per cent more expensive than anywhere else by 2014, but that hasn’t stopped price growth.

Between 2005 and 2015, the average value of a London home rose from £233,758 to £456,228, compared to a national average house price of just £197,044 last year.

Annual price growth in prime Central London slowed from 4.6 per cent in January 2015 to 1.2 per cent in January 2016 while sales volumes fell by 17 per cent during the last six months of 2015 versus 2014. This is due to government efforts like higher stamp duty and the introduction of capital gains tax for non-residents.

Tempered growth may be disappointing to some who are still seeking those double-digit surges – but are infinitely preferable to the alternative. 

6. The Crossrail effect

The new high-speed Crossrail link, due to launch in late 2018, has already had a very healthy impact on house prices along the route – and all the forecasts are that this will continue up to and after the newly rebranded Lizzy Line goes live. 

Read more: Here's how London's Tube map will look after the Elizabeth Line launches

Between the second quarter of 2008 and the third quarter of 2014, property values near Bond Street grew three times faster than places further from the rail link. But now is the turn of outer reaches of London to see house prices grow, with the likes of Hounslow and South Ruislip becoming hot spots.

It's not just the transport link of course, but what it brings: developments in areas such as Woolwich are making previously less desirable parts of the capital suddenly very desirable indeed.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.