We recently commissioned a data visualisation project around London house prices. At the moment, this is a topic that’s rarely out of the news. So we took a vast data dump on house prices from the London Data Store to analyse how house prices have changed in the years between 1995 and 2014. The results were surprising in that they far exceeded the increases we had anticipated. If you haven’t seen our visualisation, it’s well worth having a look at.

While the visualisation speaks volumes for the changes that are taking place in this great, international capital, it can’t really go into detail on exactly what is happening, and for that matter why. For this reason, it may be worth looking at some grander trends or points of interest that can be pulled out of the data.

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To kick off, the average price of a house has doubled since 2000, a 100% increase. That is put into the shade by the unprecedented change that has taken place in Hammersmith and Fulham since 1995. The borough has seen a staggering 1002% increase in the average house price.

North/South divide?

It’s a widely accepted fact that the north south divide is real and beyond that growing. As London gains more autonomy in its governance and infrastructure it is pulling at the shackles of the UK. While positive for those in London, it runs the risk of a brain drain taking place in the north and south west as skilled labour and business moves to London to capitalise on the pool of resources, be that workforce or employment. This is a genuine point of concern for the government whose HS2 plan looks to better link London with the Midlands, and eventually to both Manchester and Leeds.

But does this same divide exist within London itself?

Yes, but in reverse. The north of the river is widely regarded as the wealthier part of London, with the south often vilified as the poorer relation or just straight-up down at heel. A debate I, as a south Londoner, feel only too strongly about.

But to the facts without clouded judgement. The highest average house price in London can be found in Kensington and Chelsea at £4.9 million. See the screen shot below.

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The highest South London can muster is £1.3 million in Wandsworth.

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That makes it roughly four times more expensive to live in Kensington and Chelsea on the north bank of the Thames than it is to live in Wandsworth, on the south bank. The two boroughs are separated by roughly 200 metres of water.

So London’s inverted north/south divide is real?

Well, maybe not. In a real rags-to-riches story you need only cross the city from west to east 10 miles as the crow flies and you will land in Barking and Dagenham which is the cheapest borough in London. The average stands at £240k; that’s just 5% of the price found the other side of the city in Kensington and Chelsea.

By way of comparison, Bexley in the south is the cheapest that side of the river with rates of £298k, nearly 60% more expensive than Barking and Dagenham. Below find them compared.

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With the obvious exceptional outliers, though, the change in prices hasn’t been as stark in contrast as expected. Boroughs north of the river are 450% more expensive now than in 1995, while those south of the river experienced a 412% increase.

The shape of change

While prices have been rising for decades it is only in recent years that the increase has really started to gather pace. The graph below shows that the average London house price has gone from roughly £140k in 1995 to its current position marginally below £1m.

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The upward trend is noticeable throughout, with the upward curvature of the line showing a sharp increase in prices over, in particular, the four years from 2010 to 2014.

The reasons behind it

It’s a fairly roundly accepted point that there simply aren’t enough homes in London to accommodate everyone. In fact, it is widely reported that new homes are being built at roughly half the required rate. This means that demand massively outstrips supply. The power then sits with the supplier. If a buyer (demander) will not budge on the price they’re willing to pay, the supplier can always find another willing to pay said price. Housing tends to be a fairly inelastic product in as far as people always need somewhere to live, just because they’re being charged extortionately does not change the rate of demand massively.

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What’s more, the amount of time it takes to build thousands if not millions of new homes makes this power balance very hard to redress in favour of the demander.

Scarcity comes into play as well. It’s often overlooked that London is surrounded by the Green Belt. An area of protected countryside that circles London in an attempt to protect against urban sprawl. While this is in many ways a necessity for agriculture, forestry, outdoor leisure and clean air, it does limit the ability of London to grow outwards, adding to the scarcity of London homes and further reinforcing the upward trajectory of prices.

Additionally, it is widely believed that the banking crisis of the late 2000s has directly affected this property bubble. Banks were willing to lend large sums of money to nearly anyone. But this money wasn’t taken from one account and put into a loan rather numbers were typed into a screen. This new money was then channelled into housing, which had the effect of massively inflating the price. For a better explanation, I recommend watching this video.

 

In many respects foreign investment in this city is a fantastic thing. It brings with it the international and multi-cultural feel that this city relies on, injecting cash into the economy to ensure that the city maintains its upward trajectory. Not to mention the rich and varied opportunities for employers to ensure their workforce is not just the best in this country, but ranked amongst the best in the world. Problems begin to arise when wealthy foreign investors look to use the property market as a place to store their fortunes. Buying property that they have no intention of living in or as use for a second, third or fourth home. This serves to increase the scarcity of the product and thus further power to be thrust in the hands of the seller.

This wealth also serves to inflate the market. Those who can afford to buy a second property will be wealthier than your average first time buyer. The investor will have a lot more buying power than the first time buyer and will be able to outbid them. Over time this disproportionately skews the market, making the overall house price rise.

The result

As the video above highlighted, the increase in house prices tends to mean the city as a whole gets poorer. More money spent on buying, and persevering, a mortgage means that people have less to spend in cafes, bars, cinemas and restaurants. This has the knock-on effect of meaning those cafes, bars, cinemas and restaurants make less money. Which means they employ less people which further shrinks the circle of people being able to spend money in these cafes, bars, cinemas and restaurants.

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With the rapid increase in house prices you tend to see the poorer get moved out further and further into the sticks. This pushes out the people that first gave the area its identity. The process of gentrification tends to go as follows:

Area A becomes too pricey. Artists, musicians and creatives with little spending power move to the cheaper Area B, here they make a movement with warehouse spaces being transformed into cultural centres, a buzz builds up around the area and over time more people come to the area for the culture it inspires, rents increase, artists can no longer afford the rents in Area B and the warehouses turn into offices or flats, wealthier people move in and the culture they were chasing leaves. Artists find the next cheapest place, Area C. Rinse and repeat.

Look at Hackney for this process in action.

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But it’s not all doom and gloom. There are people that benefit from this process: the banks. With inflated prices come inflated interest payments, channelling the money that they created straight back into their pockets. This means that they can employ more people, so spending power in these sectors increases. This gets channelled into the cafes, bars, cinemas and restaurants. Who can in turn employ more people, who will spend yet further. This is a phenomenon and economic theory known as supply-side economics.

All in all then the housing price bubble, as in any situation, has its winners and losers. The ebb and flow of cultural capital, and for that matter capital, is as old as the sun and will continue regardless. The housing crisis in London is a bit anomalous to London but seems likely to continue for the immediate future. The whispers of change are beginning and we may soon be entering a point where house prices stop rising, but whether they will ever crash seems unlikely. Plateauing seems the most likely outcome, which, as wages increase will hopefully make them seem more manageable. But scarcity is scarcity and unless a few million houses pop up in the coming years that is unlikely to change.

What do you think? Connect with us on social media to let us know your thoughts.