Photographer: Jason Alden/Bloomberg

Now House Prices Are Being Cut in London Hotspots

  • Values in fringe areas shot up as buyers fled the center
  • Prices compared with income hit record for first-time buyers

On the less fashionable fringes of London, home sellers are quickly finding out just what the market can bear.

Buyers fleeing the capital’s costly center turned peripheral boroughs into London’s hottest property markets. Now, more sellers in those areas are being forced to cut their prices after values quickly outstripped the spending power of the average buyer.

The number of asking-price reductions is growing at the fastest rate in outer London boroughs such as Barking & Dagenham and Newham. Discounts have also increased in areas such as Tower Hamlets in the east and Croydon in the south.

“Peripheral areas, which buyers turned to when inner London became too expensive, have seen considerable inflation recently and reached a point where affordability is stretched,” said Neal Hudson, founder of researcher Residential Analysts Ltd. “Before, people got around it with longer-term mortgages, but the limit has been reached.”

London home prices surged 82 percent in the past decade — led by central areas such as Kensington & Chelsea and Westminster — outpacing wage growth and testing the limits of what buyers can borrow. That led purchasers to seek discounts in the city’s lower-cost outer districts, causing values to soar.

The percentage of sellers cutting prices in April rose the fastest in the eastern borough of Barking and Dagenham, where 28 percent of properties had reductions, up from 21 percent in January, according to data compiled by real estate listings website Zoopla. Newham and Redbridge had the second and third-largest increase of sellers lowering prices, the data shows.

“People are struggling with affordability and the problem is especially acute in London,” said Ian Sutcliffe, chief executive officer of Countryside Properties Plc. The Brentwood, Essex-based homebuilder has pushed down the average cost of its new homes by 13 percent in the first half from a year earlier.

Sutcliffe says that the bulk of demand for London homes comes from people who work in the capital and can afford to spend between 400,000 pounds ($518,000) and 600,000 pounds. The current average price is 680,607 pounds, according to Zoopla, while the average Londoner’s salary is 34,762 pounds.

“Before, people were moving to areas they wouldn’t necessarily want to live in because it was all they could afford,” said Paula Higgins, chief executive officer of HomeOwners Alliance, a consumer organization for U.K. home buyers. “Now that prices in those places are becoming out of reach they are just giving up altogether on the idea of buying.”

“The increase in values in these outer boroughs was definitely underpinning price growth for London as a whole,” said Lucian Cook, head of residential research for Savills Plc. He estimates that prices in the capital will stagnate this year for the first time since 2009 before rising 3 percent in 2018. “What we have seen already with discounts in the higher end market is gradually coming full circle and extending to the more affordable areas.”

Low interest rates will limit the impact of Brexit on London’s property market, but prices are already turning south, according to Ailbhe Tobin, an investment associate at J&E Davy Holdings Ltd. Values need to correct after the average price-to-earnings ratio for first-time buyers hit a record high of 10.1 at the end of last year, she said.

“Some heat needs to be taken out of London property,” she wrote in a note to investors. “Even if prices fall by 20 percent this would still leave them looking expensive at eight times average income.”

Here are the top five boroughs across the city where the proportion of the reduction in asking prices rose the most sharply in April from January, according to Zoopla.

Barking and Dagenham: 28% of Listings Reduced in April vs 21% in January

The home of Barking Riverside, a development with planning permission for 10,800 homes, has the city’s second-lowest prices per square foot for newly built properties, according to data compiled by Molior London. Values surged 11 percent in the 12 months through January, Savills data shows.

Newham: 24.5% vs 19.7%

Newham prices rose 14 percent in the 12 months through January, the second most among boroughs after Waltham Forest, Savills data shows. Five miles east of the City of London financial district, it contains the Queen Elizabeth Olympic Park built for the 2012 games. At current sales rates, it would take 1.2 years to sell all existing new housing stock in the area, according to Molior.

Redbridge: 30.2% vs 25.6%

A 40-minute commute from Liverpool Street station, Redbridge has the city’s third-cheapest new homes. Values have fallen to 480 pounds per square foot as of March 31 from 492 pounds at the end of last year, Molior data shows. That’s 47 percent cheaper than the London average of 910 pounds.

Tower Hamlets: 28.5% vs 24%

Sellers in the borough that includes most of London’s traditional East End cut prices by an average of 41,452 pounds in April, Zoopla data shows. The area saw 1,287 home starts in the first quarter, the most of any borough, according to Molior. Values climbed by just 0.5 percent in the 12 months through January after rising 74 percent over 10 years.

Lambeth: 32% vs 27.5%

Prices have doubled over a decade. Last year, 1,447 homes were started, the most since Molior began collating data in 2009. New developments include Taylor Wimpey Plc’s 55-unit Palace View and Berkeley Group Holdings Plc’s The Corniche apartments, which start at 3.6 million pounds for a three-bedroom flat.

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