3. All property types have seen similar movements in price growth and sales volumes

Figure 7 shows annual house price growth in London for flats, terraced houses, semi-detached houses and detached houses. Although they have all followed broadly similar downward trends in annual growth over recent years, only two have seen negative growth in the last few months – flats and detached houses. Flats make up a relatively high proportion of property transactions in London – around 55% in 2017 – so the fall in prices for flats, rather than detached properties, is likely to be driving the recent downturn.

Figure 7: Annual price growth rate by property type

London, January 2012 to July 2018

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Figure 8 shows sales volumes by property type for London as a whole since Quarter 1 (Jan to Mar) 2013 using HM Land Registry’s Price Paid Data, which tracks property sales in England and Wales. The amount of time between the sale of a property and the registration of this information with HM Land Registry typically ranges between two weeks and two months. Data for the two most recent months are therefore incomplete and do not give an indication of final monthly volumes.

Across the whole period more flats have been sold each month than any other property type in London. However, there was a sharp drop in Quarter 2 (Apr to June) 2016.

The rush to complete transactions in Quarter 1 (Jan to Mar) 2016 may partly explain the drop in Quarter 2 (Apr to June) 2016 but sales volumes have remained relatively muted in the period since. One possible explanation is that the higher rate of Stamp Duty may be deterring landlords from investing in the capital. London has historically had a strong buy-to-let market, with higher rates of multiple property ownership than elsewhere in the UK. With the introduction of the new Stamp Duty rates, purchasing an additional property incurs an extra 3% Stamp Duty rate on top of the existing Stamp Duty. With high average house prices in London, this 3% is likely to amount to a relatively large charge. An alternative option for investors choosing to still invest in the property market would be to split their investment between multiple properties. This would be more feasible to do outside of the capital and may reduce the overall Stamp Duty rate if investing in lower-value properties, which fall within lower Stamp Duty bands. The London housing market may also have been particularly affected by a fall in net EU migration and wider uncertainty following the Brexit referendum result in June 2016.

Additional properties may account for a higher proportion of sales for flats than for other property types. Flats also typically make up a higher proportion of property transactions in inner London than outer London. It is unclear whether the fall in annual price growth for flats reflects the fall in price growth in inner London, or the other way around, or whether other factors are affecting both.

Figure 8: Quarterly sales volumes by property type

London, Quarter 1 (Jan to Mar) 2012 to Quarter 2 (Apr to June) 2018

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4. Cash purchases account for a varying proportion of total transactions by borough

Cash purchases account for around a third of property transactions in London and have shown little variation over the period since January 2012. The proportion of sales varied from a peak of 32% in May 2017 to a low of 20% in May 2018. Average prices for cash and mortgage purchases have followed very similar trends over the period, with the average price of properties bought as a cash purchase in London being consistently higher than those purchased with a mortgage. The average price of a property bought as a cash purchase in July 2018 was £512,000 while the average price of a property bought with a mortgage in July 2018 was £477,000.

Although the proportion of transactions accounted for by cash purchases in London has remained fairly stable over time there is considerable variation between London boroughs. Figure 9 shows the proportion of property transactions in each borough that were completed as cash or mortgage purchases in 2017, as well as the average house price by borough. Broadly speaking, boroughs with higher average house prices also have a higher proportion of property transactions that were cash purchases. The proportion of property sales accounted for by cash purchases ranged from around 13% in Barking and Dagenham to around 55% in Kensington and Chelsea. The higher proportion of cash purchases in boroughs with higher average house prices may reflect the relative desirability of properties in those boroughs.

As overall cash and mortgage purchases have followed similar trends they are unlikely to explain the recent downturn experienced in London. However, some of these data may reflect that downturn. For example, the overall proportion of cash purchases in London has been slightly lower in recent months. This may reflect reduced demand for properties in inner London, which also has the highest proportion of cash purchases. The boroughs with the highest proportion of cash purchases also have relatively high average prices so reduced demand in those boroughs may account for some of the reduction of overall house price growth in London.

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5. Sales volumes in London and the rest of Great Britain increased sharply in March 2016

Figure 10 shows sales volumes in London, Great Britain, and Great Britain excluding London from January 2012 to May 2018. All three series show a sharp spike in property transactions in March 2016, immediately prior to the introduction of a higher rate of Stamp Duty on additional properties in April 2016. Sales volumes fell sharply when the new Stamp Duty rate was introduced in April 2016, with volumes in London having remained relatively low in the period since while sales volumes in Great Britain, and Great Britain excluding London both returned more closely to their previous levels.

Figure 10: Sales volumes

London (right panel), Great Britain (left panel) and Great Britain excluding London (left panel), January 2012 to May 2018

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Figure 11 shows the annual growth rate of sales volumes in March and April 2016 for each London borough. All boroughs, apart from City of London, saw a large increase in sales volume growth in March 2016 and a drop in sales volume growth in April 2016. There is no obvious pattern to the boroughs that saw the largest difference in volumes growth between March and April 2016. The lack of increase in City of London in March 2016 likely reflects the small sample size.

Figure 11: Annual growth rate of sales volumes

London boroughs, March 2016, and April 2016

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6. Prices for new-builds and existing properties are more similar in London than in the rest of Great Britian

The downward trend in sales volumes has been particularly pronounced for sales of existing properties that, since mid-2016, have broadly remained below previous trends. By contrast, sales volumes for new-builds saw a slight spike and drop around the time of the Stamp Duty change but remain in line with previous trends. Since then, transactions for new-builds have remained relatively high and have not seen the sustained low levels experienced for existing properties.

This may reflect supply-side differences as the existing property market is more able to respond in the short-term to policy changes or price changes, whereas the supply of new-build properties is subject to other factors such as long-term investments, planning permission and building times, which cannot always be changed quickly in response to market factors.

Figure 12 shows average prices for new-builds and existing properties since January 2012 for London and Great Britain excluding London. In London, both series have followed similar trends for most of the period but have deviated more recently with new-build prices outstripping those for existing properties since September 2016. This contrasts with trends in the rest of Great Britain where average prices for new-build properties have consistently been above those for existing properties throughout the period.

Figure 12: Average prices for new and existing builds

London and Great Britain excluding London, January 2012 to May 2018

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Figure 13 shows the proportion of property transactions accounted for by new and existing properties in each London borough in 2017, as well as the average price for new and existing properties for each borough. The proportion of property sales accounted for by new-builds varies considerably between boroughs, from a high of 45% in Newham to a low of 3% in Islington.

The sustained demand for new-build properties as well as the recent growth in prices for new-builds may be partly driven by changes to the Help to Buy scheme. Help to Buy in England provides a loan to people purchasing a new-build property up to the value of £600,000, other similar schemes operate in Scotland, Wales and Northern Ireland. The buyer must provide a deposit of at least 5% of the property value with an additional 20% of the value being provided as a loan from the government. In February 2016, the government increased the upper limit for the equity loan from 20% to 40% for Greater London.

House prices in London are historically high and remain unaffordable for many, with potential buyers also often facing high rents, which make it difficult to save for a deposit. By reducing the amount of deposit required, Help to Buy is likely to make purchasing a new-build property more feasible for potential buyers. This may partly explain the sustained demand, and prices, for new-build properties as a proportion of those who can buy new-build properties would be unable to afford to buy an existing property without the help of the equity loan. This is likely to be particularly relevant in boroughs where the average price of new-build properties is close to, or even less than, that for existing properties.

Help to Buy release data on the number of Help to Buy equity loans taken up by London borough by quarter. Although the data are not directly comparable with the HPI we can use them to give a sense of how many new-build transactions may be accounted for by Help to Buy transactions in each borough. There appears to be no clear correlation between boroughs with a high proportion of new-build transactions and a high proportion of those transactions being completed through Help to Buy. Those with the highest proportions of new-build transactions generally have amongst the lowest proportions of Help to Buy loans. This suggests that the high proportions of new-build transactions are not being driven specifically by Help to Buy, but may reflect other factors such as the affordability of properties, general demand for properties in those boroughs and other local factors.

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7. Conclusion

Recent negative house price growth has primarily been concentrated in inner London but the most recent data suggest it may now also be radiating outwards. This may reflect trends seen previously where changes start in inner London before moving outwards to the rest of the capital and the rest of the country. On the other hand, in the context of previous sustained high price growth, the recent downward trends within London may reflect factors that are less relevant to the rest of the country.

London seems to have been more affected than the rest of Great Britain by the dip in sales volumes in the second quarter of 2016. This may be because London historically has a relatively large proportion of additional properties that are now subject to a higher rate of Stamp Duty. It may also reflect other factors such as uncertainty following the Brexit referendum result and local factors given the variation by borough.

Sales volumes for existing properties fell by more than those for new-builds from mid-2016. However, average prices for new-builds have grown more quickly in recent months than those for existing properties. This may partly reflect the influence of the Help to Buy scheme that makes it easier for people to purchase a new-build property under £600,000. Boroughs with average prices below £600,000 are more likely to be in outer London than inner London, which may account for some of the difference in house price growth between inner and outer London.

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8. Authors

Kathryn Keane, Ellys Monahan, Tom Martin and Sam Barrett.

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Contact details for this Article

Kathryn Keane
macro@ons.gov.uk
Telephone: +44 (0)1633 455714