London property – the ultimate investment?

Is investing in property in London the nearest thing you can get to a safe bet? Property prices in the capital keep rising, despite wider problems in the housing market.

In fact the gap between property values in the capital and in the rest of the country is now wider than ever, according to new data from estate agents Savills.

London property prices used to be seen as a bellwether for price movements in the rest of the country, with prices in the capital rising or falling first, and usually by a far larger margin. But this no longer seems to be the case.

Over the past five years the London market has not only outperformed the national average but been moving in the opposite direction. House prices in the capital have risen by 6pc over the period while elsewhere they have fallen by 11pc, according to the estate agents Knight Frank.

The differential becomes even more stark when you look at price movements in London’s most expensive residential boroughs. House prices in Kensington & Chelsea, for example, have risen by 37pc over the past five years. Prices in such prime areas show a closer correlation to prime regions in global cites such as New York or Hong Kong than to prices in Newcastle upon Tyne, say.

“It is the strength of demand from overseas buyers that has driven up prices in central London boroughs and underpin this market,” said Lindsay Cuthill, the head of Savills Fulham. “Prime areas – like Chelsea, Westminster, Hammersmith, Camden and Fulham – have a relatively low correlation with the rest of London, let alone the rest of the country, suggesting they really are in a world of their own.”

According to figures from property developers de Candole Residential, half of the properties priced at £2m or more in London are bought by overseas buyers. And these international buyers snap up 70pc of properties in the capital sold for more than £10m. Money has poured in from Russia, the Middle East and increasingly from European investors – possibly concerned about the potential devaluation of assets in European cities should the euro break up. And the weakening pound has made such investments even more attractive to overseas buyers.

Property prices are ultimately driven by supply and demand, and it isn’t just the demand side of this equation that has fuelled rises. Strict planning controls and the lack of land for development in central London are a constant brake on supply. In fact, in recent years the trend in prime regions has been to convert existing flats into a larger “family” homes – further reducing supply.

At the same time, while the global workforce may be very mobile, those buying in the capital don’t tend to sell their property if they move out as the strong rental yields make for an attractive investment. As a result there are now 30pc fewer “unsold” homes on the market than in the five years before 2007, when the market dipped. Elsewhere in the country this trend is reversed.

London may be insulated to a degree from the problems affecting the wider housing market, such as the availability of mortgage finance or a lack of first-time buyers causing problems in the housing chain. Your typical Russian oligarch isn’t in his local Halifax branch quibbling about the deposit needed. But this doesn’t mean that the prime regions exist entirely in their own bubble.

The strong price rises in these locations have had a knock-on effect on other inner London boroughs and key commuter towns. Andrew de Candole of de Candole Residential said: “There has been a ripple out to some outer London postcodes and along the commuter belt. Most of these sales have come from UK home owners selling to overseas buyers, then buying elsewhere.”

He added that areas such as Cheshire, Oxshott, St Georges Hill and Wentworth were also in demand, sought after by footballers, those with City bonuses and affluent Russians alike.

Mr Cuthill added: “Last year there was little evidence of the expected ripple of wealth out of London, but this year looks different. We are getting clear signals from our agents that there are early signs of a much better market, although it tends to be focused on key commuter regions.”

This perhaps explains why certain locations outside London have also bucked the national trend and risen, rather than fallen, in value. According to Knight Frank, house prices in both Buckinghamshire and Surrey have risen by an average of 4pc over the past five years.

Savills points out that property in some commuter towns and “desirable” regional cities is now worth more than – or is close to – its 2007 peak. Weybridge, for example, is 12.4pc above its previous peak, Sevenoaks 7.3pc and Cambridge 6.6pc. Esher and Cobham (both in Surrey) are 0.5pc above.

Homes in Henley, Oxford, Winchester, Bath and Bristol are all still typically worth less than they were in 2007, but recent price rises have been ahead of national price movements in the past few years.

Not everyone is convinced that London house prices are completely divorced from wider market forces, however. Martin Ellis, a housing economist with the Halifax, pointed out that many outer London boroughs, such as Enfield, saw prices rise by just 1pc last year, while Barking & Dagenham saw prices fall.

He said the big divide wasn’t London versus the rest of the country but the split between house prices in the North and South – a gulf that has widened since house prices started to fall in 2007, reflecting the relative economic strength of each in the wake of the recession.

“London has led the way in terms of house prices in the past few years, but the rest of the South of England has also generally fared well,” Mr Ellis said.

By contrast, parts of the North continue to see significant house price falls – in Oldham, for example, prices fell by 11.5pc last year. Even Edinburgh, which has its fair share of desirable properties, saw prices fall by 5pc last year, and they remain more than 20pc below their 2007 peak.

7:15AM GMT 09 Mar 2013