Tales of foreign tycoons and City billionaires buying property in the most
exclusive parts of London for eyewatering sums have become so familiar in
recent months that they barely raise an eyebrow. Figures from Savills estate
agency show that the prices of houses in a strip of the capital from Mayfair
to Kensington rose by 50% in the year to the end of March.
A six-bedroom townhouse on Thurloe Place, South Kensington, for example, sold
in March last year for £2.35m, then in October for £2.79m; now, thanks to a
lick of paint and a new kitchen and bathrooms, it is under offer for almost
£5.5m. Countless other examples abound across what agents call prime central
London.
At first sight, such excesses may seem of little more than curiosity value to
the rest of us, as we struggle to pay the mortgage on a modest semi in the
suburbs and beyond. Yet a new study shows that the vast amount of foreign
money flooding into the top end of the capital’s housing market is causing
ripples further afield that may counteract the effects of rising interest
rates and prevent what some have predicted is the inevitable bursting of
Britain’s property bubble.
The principle is simple, according to Yolande Barnes, director of Savills
Residential Research, which carried out the study. “There is a large amount
of cash being funnelled into London, mainly as a result of the high number
of foreign and overseas purchasers,” she says.
“We have seen anecdotal evidence of how this gets exported to other parts of
the country. We see growth in prime central London, followed by growth in
the prime home counties market. Equity ripples outwards, finding its way
down the housing ladder.”
According to this theory, people who sell to Russian oligarchs or City-bonus
boys tend to put a substantial amount of the proceeds back into property.
But they often split it, buying a smaller place in the same area and
somewhere else out in the country, perhaps, or a cheaper flat or two for
their children. This drives up prices in those sectors of the market,
putting more money into the pockets of sellers – who, in turn, will also
probably want to buy property, and, again, maybe more than one home. And so
the money cascades down.
Although the effect is difficult to quantify, agents in London and some prime
rural spots say that there is already anecdotal evidence of it. “You can now
sell a Chelsea house for £5m and buy a place in the country for £2m, leaving
quite a lot in the bank,” says Tim Le Blanc-Smith, director at John D Wood,
which has offices in the choicer parts of the capital. “I know that in our
Oxford and Winchester offices, a lot of buyers are from London.”
Matthew Harrop, his colleague, adds that many of their clients downsize to
smaller properties in the same area. “One person who sold his Kensington
house through us recently was able to fund his onward move solely from the
uplift, through competitive bidding. We asked for £12m and ended up with
£15m.” That £3m difference bought the seller a maisonette in Holland Park.
Andrew Rome, head of Knight Frank’s Winchester office, has also noticed a
substantial increase in buyers from the capital, particularly those with “a
lot of fire power”. At the top of the market, about 40% of buyers are those
moving out of London, he says, and prices in the highest band have risen by
up to 15% as a result.
“It has been quite dramatic,” he adds. “We have had better quality, and a
greater quantity of homes, on the market this year, but there have been a
lot more people bidding for them. Broughton House, for example, was in
Country Life a fortnight ago, with a guide price of £6m. About 60% of the
people who have viewed it are from London, and that money has originated
because they have sold or are going to sell.”
A similar effect is being felt in the Cotswolds, another popular spot for
those downsizing from the capital. “Particularly over the last 18 months, we
have seen a lot more money coming from London,” says Simon Merton, associate
at Strutt & Parker’s Moreton-in-Marsh office. “They are not necessarily
amazingly wealthy themselves, but they may be selling to people who are, and
that money is rippling out to here.
“We have seen values rise quite considerably – in general, an increase of 3%
to 5%, and much more at the top of the market. For houses of £2.5m or more,
people are prepared to pay £200,000 or £300,000 more than the guide price.”
We have been here before, says Savills, which believes that, judging by past
experience, the effect takes 10 years to trickle down to the rest of the
country. In fact, the last time the most expensive parts of London saw 25%
annual price growth was a decade ago, in 1997. This was followed by spikes
in growth in various other sections of the market, finally reaching the
bottom of the market about two and a half years ago.
So, this time around, will the effect be strong enough to counteract rising
interest rates, which have substantially driven up the cost of home
ownership over the past year (at least for the bulk of buyers who rely on
mortgages)?
Michael Taylor, senior economist at Lombard Street Research, is not entirely
convinced, although he says you should not discount the effect of “Russians
turning up with a few million pounds in cash” on prices in general. “The
effect on the whole UK market should not be exaggerated,” he says. “There
may be something of a ripple effect when people cash in and move out, but
I’ve not seen any evidence that it is all that pronounced.”
Richard Donnell, head of research at the property analysts Hometrack, points
out that prices in six regions are now rising at less than 2% a year. “How
much would London have to go up by to produce this ripple effect? If
anything, it will be short and focused on the southeast,” he says. “Higher
interest rates and sheer affordability pressures mean there will not be a
big surge again.”
Savills is sticking to its guns, however. It believes that the UK market as a
whole will end up 7% higher this year, although it admits that prices will
rise more slowly if base rates stay at 5.5% or higher for more than three
months. The danger point, the agency believes, is if rates hit 6.5% – at
which point mortgage repayments cost people so much that they have little
money left over to pay for anything more than basics such as food or
clothing.
Even then, the experience of 1988 shows that it takes a while for house prices
to fall.
So, the next time you read about a super-rich Russian forking out millions for
a west London pile, a little toast might be in order – he may be bolstering
the value of your own home.
