In 2006 the City and Docklands residential market experienced the highest rate of price increases since the dot.com boom of 1999-2000, with prices up by 22% in the City and 26% in Docklands (Figure 1), compared to a national average rate of around 9%. This built on growth in 2005, such that prices rose by a remarkable 30% in just two years.
Figure 1 illustrates that between 2000 and 2005 residential prices changes in the City and Docklands property were unremarkable, but moved within a narrow range of +/- 10% in response to housing market factors and external economic and political stimuli. In 2006 the market made a definitive move outside that five-year range, taking prices in the City and Docklands, along with other parts of central London, into un-chartered territory, as we predicted in our end of year Residential Review 2005.
Rising house prices combined with high rates of employment growth in the City and West End also increased demand for rented accommodation, with an 18% rise in rents in 2006 taking rents to record levels. Rents have now been on a rising trend for three and a half years from mid-2003. Hurford Salvi Carr, alongside the majority of estate agents in London, experienced a trend towards transacting more leases than sales in 2006, illustrating the growing importance of rental property in the City and Docklands, where a fluid labour market continually attracts new, often young, workers.
This major market trend is set to continue as fewer properties will be offered for sale for the following reasons:
? Many developers are now undertaking 'build-to-let' schemes, retaining new homes for their own investment portfolios. If these properties are eventually sold, it is likely that they will be sold to other investors rather than broken up for sale to owner occupiers.
? In turn, a very significant proportion of new homes that are not retained by developers are being sold to all categories of investor, from individual buy-to-lets to discounted bulk sales. Investors, for example, are typicallyable to out-bid first time buyers.
? In the second-hand market, there is a growing trend for owner-occupiers to retain their existing properties when trading up, in order to establish or enhance a property investment portfolio.
Aside from price and rent increases, the distinguishing feature of the market in 2006 was the speed of sales and lettings of individual properties. Consequently, there was a shortage of choice of accommodation for sale or letting at any one time. The absence of an extensive number of properties for sale, however, did not imply low rates of turnover. The imbalance of supply and demand meant that
sales negotiators were able to put newly available properties to a large list of applicants, with the internet and email themarketing vehicles of choice, although in the two weeks it takes to list a property on a web site, many had already been sold. Advertising in the property supplements thinned, with the
bellwether Evening Standard New Homes section carrying fewer advertisements than normal, with the majority being offered outside London.
The market 'paused for breath' in May and June 2006, as reported in our 1st Half Residential Review, but by every measure the market has been 'hot' in the second half. London's economic mini-boom and accompanying house price growth, and its spread into the wider south east, was one factor behind the Bank of England Monetary Policy Committee's decisions to raise the base rate to 4.75% on 3rd August 2006 and to a five year high of 5% on 9th November 2006. The first increase evidently had no impact on the City and Docklands market, where the drivers of employment growth, pay rates and annual bonuses were not dented by a quarter point increase. Nor did the November increase in itself have an immediate impact, given the imminent payment of City bonuses and general level of confidence founded upon a strong economic outlook.
Confidence, rising prices and rising rents can be attributed to a number of key factors:
London employment boom ? The Purchasing Managers Index (PMI)/Royal Bank of Scotland monthly survey shows that London firms added to employment consistently from the beginning of 2004, with a strongly rising trend from mid-2005 onwards. The Centre for Economics and Business Research (CEBR) reported in August 2006 that City jobs growth of 4% in 2006 to 335,700, would take the number mployed past the previous peak in 2000 of 324,100.
Stockmarket ? One of the factors that took the heat out of the housing market mid-2006, was a sharp 10% fall in the FTSE 100 index from 6,100 to 5,500 points in May. Since then the index recovered those losses rising to 6,256.8 points on 16th November 2006, a gain of over 10% on the start of 2006.
City bonuses - Within London, the City's financial and business services are growing very strongly, backed by high volumes of share trading, merger & acquisitions activity, trading in derivatives and hedge funds. According to recruitment consultant Morgan McKinley (September 2006), most City workers expected their bonuses to be 50% higher than last year, with almost a quarter expecting them to double.
Stock shortages ? Our research shows that the majority of estate agents in the City and Docklands typically had under ten properties available for sale at any one time at the end of 2006, compared with 15-20 at the start of the year. In EC1, only 72 properties were for sale at the end of November in an area covered by 25 London estate agents.
This is an indicator, given that transaction levels are still high, that properties are not even reaching web sites and that supply has been affected at all levels of the market. London Estate agents are using old fashioned techniques like the telephone to sell properties! High prices In the sales market high and rising prices became a self fulfilling prophecy in 2006. The high entry prices for one and two bedroom flats, at £330,000 and £425,000 in the City, reinforced demand for rented property and contributed to rising rents, which in turn supported capital values in a market where investors form a high proportion of buyers.
Taken together, the above factors created a 'virtuous circle' with economics, employment, supply constraints and confidence mutually reinforcing the market. No doubt there are some who will see the latest data from 2006 as evidence of over-exuberance and an asset price bubble in the making. Such theories must not be dismissed out of hand. The fact is, however, that the City and Docklands market is underpinned by the highest paid workforce in Europe, a workforce that is currently riding the up-cycle of a cyclical wave. It would take a major external economic shock to prematurely dampen that wave. In addition, there is the added comfort that while UK house prices rose above trend for most of the early 2000s, in London there was a much lower rate of growth (Figure 1). We would argue that London, including City and Docklands, is now 'catching up' after a five year period when housing became increasingly affordable.
Our forecast for 2007 is that sales prices in the and Docklands property will increase at a rate of 10%, with the majority of the growth in the first half of the year. We consider that the rental market will perform strongly in response to continued employment growth and the high entry price of owneroccupation, and we forecast an increase in residential rents of 15% for 2007.
