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Outdated Concepts In The New Property Market

“The ripple effect”, a concept well known in the property market which is defined as upward movement in the London property market spills out elsewhere to the rest of the UK. This phenomena officially has disappeared this has become an outdated concept in the housing market. The drivers of the central areas of London today are different to what drives the rest of economy. In one sense the world is continuously changing and so driving forces affecting property are always changing. What has a dominating effect now may not be the case in years to come. Though property is always underpinned by a basic need –for humans to have shelter. Going back to thousands of years this is something which never changes.

At one point first time buyers were said to be an essential component to ensure the health of a property market, as afresh influx of them would drive the market bottom up. The reason why importance was placed on the first time buyer is they are fresh buyers and once they have taken the first step on the rung housing ladder they would stay on the ladder and only move upwards. Hence it is speculated you have a new entrant to the market who will stay there for life.

So what does drive this market now?

Let’s look at what some of the leading figures in the industry are saying. Simon Rubinsohn, chief economist at the RICS, says: “One reason is the preponderance of foreign buyers. Turmoil sweeping much of Europe and the Middle East has heightened the appetite for safe havens; london’s prime property market neatly fits this bill. Meanwhile, despite the pressure on the financial services industry, the skills required in the sector remain in heavy demand and attract significant wage premiums. The result of these two developments is that prices in the capital are being pushed upwards at a time when economic uncertainty is encouraging buyers in many other parts of the country to be a little more cautious.

“In his opinion there are two factors driving the market: foreign buyers looking for stability and the financial services industry.

Agents from international firms often get requests from buyers overseas to purchase properties blind, without looking at the property due to the urgency the money needs to leave the country by.

Figures in all price sectors support the argument that london now operates separately from the rest of the UK.

Look, for example, at the Nationwide’s house price data for the second quarter of 2011, compiled from lending data to buyers predominantly at the mid and bottom end of the market. Average values were down year-on-year in all regions except london. The average price in london was 0.2 up in the quarter while across the rest of UK there was a 1.2 drop.

At the top end Knight Frank says prime london prices are 10 % up over the past year, with values in central areas now 35% above March2009’s trough. This is not the case outside london, top end prices are slipping.

“With 74% of buyers in prime central london being from overseas and 50% of sellers being from the UK, the reason for the continued strength of london’s market is clear,” says Countrywide chief executive Grenville Turner, “The change from previous cycles is the perception of real estate in london’s most sought-after postcodes as a unique and safe asset – one which offers a degree of protection from the vagaries of the global economy and geopolitical risk.

In addition, london has very tight planning restrictions, which keeps supply tight,” explains Camilla Dell of buying agency Black Brick.”

Supply and demand dynamics are widely different in london compared with the rest of the UK, with London constantly seeing demand outstripping supply. The rest of the UK is much more of a domestic buyers ‘market and therefore much more susceptible to a weak economy and a weak mortgage market” says Dell.

The concentration of foreign nationals in london – an escalating phenomenon in recent years – means many go on to sell their properties to other foreign nationals. Such vendors are highly unlikely to move to the suburbs or rural areas, as former UK sellers would have done, so this sharply limits the extent to which housing equity built up in London ever gets beyond London.

Nor is this likely to change even in the long term, unless there is a catastrophic crash in values allowing more buyers to come in, or an equally dramatic strengthening of sterling to deter those foreign buyerswho regard london as good value at the moment.

Taking away all of the above and sticking to the first mantra of property investment Location, Location, Location will ensure your money is put in the right place.

Suresh Vagjiani

Managing Director

Sow & Reap

A Property Investment & Financing company.

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