There are two things we can be sure of when seeking growth in the UK economy.
The growth of tomorrow will come from the small companies founded today, and the price of assets is formed by the supply of assets/goods versus the demand for those assets/goods. (Incidentally, the former would be impossible without space in which to house these companies).
These two principles work as close to max efficiency as possible, provided that there is no market intervention (policy decisions, taxation, etc.). Yet it is impossible to exist in a world without some level of intervention from sovereign authority. Usually the reason for interfering is to ensure fairness and stability in an otherwise volatile market. It could be milk prices to help farmers, the regulation on Carbon emissions from vehicles or the suggested taxation on sugar levels. Each affects the prices at various stages and so affects the overall market.
If we apply this to the property market, then we begin to see how property prices in certain areas are affected by supply, demand and policy. Every decision taken to intervene has an impact on decisions, as mentioned earlier even the carbon emissions policy has an effect construction, especially in the greater London area. Local councils across the UK can have tremendous influence. The permission for development, the granting of licenses and changes of use, all affect prices on a local or micro level.
Hackney council in London, for example, has been heavily reluctant to grant conversions of commercial property to residential property in the Shoreditch, Old Street and Hoxton areas. The area has seen vast residential price appreciation, fuelled by gentrification over the last 30 years.
The influx of creative and technically skilled young professionals who had been seeking a more affordable level of accommodation to live and work has changed the landscape of the area.
The demand from those wanting to be a part of the cultural shift accelerated this culminating in a supply shortage; simply there aren’t enough properties in the area to quench the demand for those wanting to live in the areas. According to research by Sterling Ackroyd since 1987 prices are up 864% by comparison greater London on average has achieved 453%.
Prices per square foot are now on par with High gate, angel and other boroughs historically associated with affluence.
Much has been reported in recent weeks about the London property market reaching fever pitch and being due for a massive price correction possibly in 2017. UBS, being one outspoken advocate for this belief, recently released their updated Global real estate bubble index, which purported that very conclusion.
To take this at face value would in my opinion be hasty.
Changes to stamp duty, stricter lending rules under the MMR the possibility of an interest rate hike towards the end of 2016 and the housing and planning bill passing through parliament, have all been cited as reasons to quell a dangers bubble explosion.
Yet all of this is matter of fact when as a nation we aren’t building anywhere near enough homes. It has been estimated we need to be constructing over 200,000 homes per year to keep up with the pace of demand 50,000 of which are required for London alone. Provided the population maintains its levels of expansion through organic and migration based growth it should be on course to pass 9 million by 2020.
London is a sprawling metropolis, one of the greatest cities on the planet a place where people migrate to from all corners of the earth: something that looks unlikely to change anytime soon.