Money Management

A mini boom in the UK property market? For houses, yes, but not apartments

Ruth Baker has an urgent deadline. The graphic designer and her husband are desperate to buy a four bedroom house they found in Hitchin, Hertfordshire by mid-January so they can apply for a place in primary school for their three-year-old son . However, they must first sell their apartment in Muswell Hill, north London.

“Houses in Hertfordshire are requisitioning very quickly,” she said. “And we naively thought our apartment would sell easily too. “

Yet after almost two months on the market, and despite the asking price reduction from £ 15,000 to £ 525,000, they had five views and no offers. “[Our estate agent] Didn’t explicitly say that our apartment is struggling due to the lack of outside space, but I’m sure it is.

While the UK property market has experienced a ‘mini boom’ since it reopened in May – in October, the average house price rose 7.5% year-on-year, hitting a new high, according to Halifax Bank – the pandemic causes an increasing number of buyers to flee the apartments.

In London, the average price of an apartment increased more than any other type of property between 2011 and 2019. But over the past 12 months, this has reversed and apartments have performed the worst.

This year is expected to be the first time in more than a decade that apartments account for less than half of all property sales in the capital, according to real estate agents Hamptons International. He adds that London apartments take an average of 70 days to sell, while houses take only 29 days. And that is if they sell.

A separate analysis from PropCast, which maps the housing market, finds that only 27% of all apartments listed find buyers, compared to 44% of homes.

This is partly explained by a drop in the number of first-time buyers, who almost always buy apartments. According to real estate portal Zoopla, the proportion of UK properties purchased as first homes has fallen to its lowest level in five years thanks to the economic fallout from the coronavirus and the reduced availability of higher mortgages.

Apartments are also losing their appeal at the high end of the market. Data firm LonRes said the number of apartments sold in major London areas in August and September was 24% lower than in the same period last year, while the number of houses changing hands has increased by 3%.

Indeed, this year, homes accounted for a higher proportion of prime property sales in London than any year in the past decade. The value of apartments sold in these areas is 1.8 percent lower than a year ago, while house prices are 6.1 percent higher.

Column chart of Annual House Price Change, September 2020, by type (%) showing Apartment prices have fallen in top areas of London *

The image echoes nationwide, with houses selling faster than apartments over the past six months in UK cities, according to David Fell, senior analyst at Hamptons International. “This is the longest time on record that homes have outperformed apartments,” he says. “Buyers are looking for more space with additional containment and so they can work more easily and comfortably from home. ”

So what does all of this mean for the future of London apartments? They represent just over half of the capital’s housing stock, more than double the proportion anywhere else in the country.

Column chart of apartments as a share of sales (%) showing Since the pandemic, apartments have made up a smaller proportion of property sales in London

Andrew Groocock, regional partner at Knight Frank Estate Agents, says it’s all about size and access to outdoor space.

“Overall, apartments are not falling out of favor in London,” he says. “But small studios or one-bedroom apartments with no outside space are a challenge in today’s market, with the prospect of future bottlenecks hanging over the minds of buyers.”

“Having a property with enough space – especially for a home office – is the most crucial thing on the minds of buyers,” says Henry Sherwood, Managing Director of The Buying Agents.

As a result, some chic London apartments are being offered for sale with big discounts. A three-bedroom apartment with no outside space, now on sale for £ 2.2million in Knightsbridge, has been reduced by £ 1.05million since it was first listed in December last year. A five-bedroom apartment in Chelsea now costs £ 1.25million less than its original price of £ 4million. “There are still a lot of overpriced stocks in the market,” Sherwood says.

One of the reasons for the decline in popularity of more expensive apartments - like those in London's Knightsbridge district - is that Covid-19 is driving foreign buyers away

One of the reasons why more expensive apartments – like those in London’s Knightsbridge district – have declined in popularity is that Covid-19 is driving foreign buyers away © Getty Images

Another reason for the sharp decline in the popularity of more expensive apartments is the fact that Covid-19 is pushing away foreign buyers, who have traditionally bought large swathes of the capital’s new apartment stock.

“We’re still selling off plan to buyers in Hong Kong and China for up to £ 1.5-2million, but if a property costs more than that, they’ll want to examine it in the flesh,” explains Ed Lewis, Residential Development Sales Manager at Savills Realtors. He adds that sales of over £ 2million in the international market are down around 25%.

Once the pandemic is over, demand for apartments in London is expected to return. With the UK government planning to roll out vaccination doses as early as next month, many are hoping it will be as soon as possible.

Hamptons data shows some homeowners have already bought apartments – overall London sales to investors rose 65% between June and October, compared to the same period last year, nearly half of which were apartments .

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However, Phil Hubbard, professor of urban studies at King’s College London, is hoping that Covid-19 will reverse the trend of investors and developers to create smaller and smaller apartments for young professionals and students.

His department’s research shows that the proportion of new housing in London smaller than the national minimum recommended by the government the space standard of 37 m² increased from 5% to 8% between 2015 and 2019.

“Dense city life can be more environmentally friendly and energy efficient,” Hubbard said. “But if the price to pay is that people live in smaller homes that prevent flexible work and home living, and also encourage transmission of Covid-19, or other as yet unknown viruses, the answer is no. It is perhaps not to continue the rush to vertical living and micro-apartments.

Ruth Baker, meanwhile, has asked her real estate agent to start contacting rental investors in an effort to speed up the sale of her apartment. “Surely there are people who still need to go to work in London and are looking for a place to rent?” ” she says. “Although a lot of our friends with children want to leave, not everyone is trying to leave London.”

Is this the end of the housing ladder?

A lot of people buy apartments because that’s all their budget allows, of course, but are apartments still effective as the first rung on the housing ladder?

Not according to Neal Hudson, an analyst at the consulting firm BuiltPlace. “The housing ladder is finished,” he says. “The idea that you can buy an apartment in a city center and then, after a few years, exchange for a house in the same neighborhood no longer works for the vast majority of people.

To move from an apartment to a house, a homeowner needs inflation in house prices and the ability to borrow more as their income has increased.

This won’t necessarily work, however, if house prices are rising faster than apartment prices and incomes are not rising at a significant rate. Over the past year, the average price of a terraced house in London has risen 5.84%, according to Hamptons, while fixed prices have only risen 1.74%.

Mortgage broker SPF Private Clients looked at what this could mean for apartment buyers if current trends persist. If a first-time buyer wanted to buy a two-bedroom apartment in Kentish Town, a district in north London, for £ 450,000, would they be able to buy a house there?

It is complicated. Assuming they can find a 25% down payment first and then the £ 3,340 purchase fee (which comes to £ 10,840 after the stamp duty holiday ends next March), they would need an annual income of £ 75,000 to qualify for the mortgage (assuming a maximum loan-to-income ratio of 4.5 x salary).

If they then kept the apartment for 9.4 years – which is the average length of time that sellers who have sold apartments in London this year have kept them – the property would be worth £ 529,218, assuming prices fixed increases by 1.74% per year.

During this period, mortgage payments would be £ 1,431 per month which is certainly cheaper than the current typical rent for this type of property, which is £ 1,600, although rents may increase over time. .

If the buyer wanted to move to a three-bedroom terraced house in the same area it would have risen from £ 950,000 to £ 1,619,690, assuming 5.84% annual growth for 9.4 years.

If they could take the equity out of the apartment and pay the costs of buying the move (£ 108,112 in stamp duty plus the total transfer and appraisal fee of £ 4,550) then their annual income would have had to almost quadruple to reach £ 294,598 to qualify. for the mortgage.

All of this means that apartment owners hoping to swap will instead have to move to a cheaper area, says Mark Harris, managing director of SPF Private Clients.

“Commerce has been a big trend for apartment owners in London in recent years.
and we expect it to become even more pronounced.

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