London Home Prices Under Pressure From Weak Employment, Eurozone Debt Crisis

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According to Chesterton Humberts/CEBR DECMBER 2011 House Price Poll of Polls, London house prices throughout most of the year, have been insulated from the effects of the recession and public sector job losses.

However, potential buyers have become concerned about the Eurozone sovereign debt crisis in recent months, which has started to negatively affect the capital's house prices. According to the Chesterton Humberts Poll of Polls, London house prices have fallen by 1.0% in the fourth quarter of 2011 compared to the previous quarter. This puts the current London house price average at £342,286 in December, which is around 2.5% higher than the same month last year.

Annual price growth in London has slowed to 2.5% in 2011 after rebounding by 10.3% in 2010. This 'below-trend' growth in house prices is partly explained by a net loss of 26,800 city jobs in 2011 - representing a 8.5% annual fall in city employment.

Lower numbers of city jobs ultimately means lower demand for house prices - and at the same time bankers' bonuses (which are traditionally invested in property) have fallen by £0.5 billion (from £7.3 billion in 2010/11).

Report Highlights:

• London house prices have fallen by 1% in Q4 2011 compared to Q3 2011, or £3,130 in monetary terms.

• London house prices have finished the year up 2.1% in 2011 compared to 2010 as a whole. This compares to prices in the UK falling by 1.4% as a whole.

• The level of city-type jobs employment is a lead indicator of London house price growth. City job employment fell year-on-year by 8.5% in 2011.

Chesterton Humberts' CEO Robert Bartlett tells World Property Channel, "The possibility of a 'Eurogeddon' continues to impact the prime central London market.  We are seeing an influx of Eurozone buyers seeking steady yields and low volatility but there is very little stock available.  Many are investors seeking buy-to-let properties in the £500,000 to £2.5mn range which will rent to professional and corporate couples and families or high net worth students.

"However, properties in prime areas that are owned by international investors tend to be held for the long term and they currently have no incentive to sell, even to upgrade, so little is coming onto the market.

"The lack of transactions is likely to be the one factor that ensures some growth in the London market in 2012. Demand is still fuelled by the number of international investors who continue to regard London as the safe-haven of choice. The lack of stock is causing asking prices to rise as agents attempt to outbid each other to win instructions. The danger, of course, is that vendors become unrealistic in their expectations and market stagnation follows which is exactly the situation within the Country House market."

A stagnant mortgage market and weak economic growth in the economy have kept a lid on house price growth throughout 2011. The total level of mortgage approvals from January to November 2011 equalled 544,072 - 2.1% lower than the same period a year earlier.

Year-on-year, house prices have fallen by 0.9% in December, which is still marginally better than the 1.2% fall reported in the previous month. This is owing to better economic conditions in December 2011 compared to the same month last year - when freezing conditions gripped the UK and stalled growth.

December's better than expected services sector performance suggests that the UK will narrowly avoid contraction in Q3 2011. Furthermore, falling consumer price inflation since September 2011 has also relieved the squeeze on real disposable incomes, increasing mortgage affordability and supporting demand.

Despite conditions improving in the short term, the housing market remains in a state of fragility. Furthermore, house prices are falling month-on-month across all regions including London, where reduced bankers bonuses and weak financial services activity has stymied house price growth.

CEBR's Douglas McWilliams commented, "This month's Chesterton Humberts Poll of Polls shows that while London may have some buffer against the public sector spending cuts, it is by no means insulated from the Eurozone sovereign debt crisis across the channel. Our research shows house prices in the capital are experiencing a sticky patch at the moment as both City bonuses and jobs are on a downward trend. This is likely to impact confidence in the market, although London house prices are still slightly higher than last year when adverse and snowy weather derailed economic growth."