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Has the buy-to-let bubble burst in London?

In the wake of rising house prices and the rising demand for rental property, the UK’s buy-to-let market is booming. In recent years, the market has increasingly shifted from a culture of homebuyers to a culture of “rentysomethings” who have no choice but to rent a home instead of buying, since they have been priced out of the market as prices for first-time buyers skyrocket. It is in this current climate of surging rental demand that the buy-to-let market has truly thrived, with savvy investors making the most of the high demand for rental property and the rising rents.

So what has changed in the buy-to-let market? Interestingly, it has come about in the wake of this national rental trend that more and more investors are migrating north of the capital, where it has been well documented that house prices are significantly cheaper than their London counterparts and, as a result, the returns on investment are much more lucrative for investors, with regional cities offering higher than average rental yields and potential capital growth.

On average, a home in the capital costs in excess of £514,000, compared to just £162,276 in the North-West of England, a region renowned of late for its incredible regeneration projects and its rising popularity. The cost of housing in London is more than three times the cost of a property in the North. To put this staggering figure into perspective, the cost gap between North and South is now in excess of £360,000, a figure more than the cost of an average UK home, which is in the region of £274,000, as of August this year.

Furthermore, while house price growth has been evident in almost every Northern region of late, recent figures have shown  that growth in the capital has both slowed and even decreased in some areas for the first time in nearly four years, and is showing every indication that this trend is set to continue over a sustained period. Most notably, the Royal Institute of Chartered Surveyors (RICS) has reported this drop in values in the capital, and have forecasted values to keep decreasing in the London area, citing both falling buyer demand and new vendor listings as just two reasons for the drop in the capital’s transaction levels in recent months.

Because of this huge gulf in the housing market between the North and the South, it is no surprise that there has been an unparalleled exodus from the capital for the first time, with investors seeking better returns on investment offered by regional cities. Even huge national corporations are seeing the benefits of migrating Northbound, with both the BBC and ITV studios choosing to relocate their famous studios from the capital to the picturesque Salford Quays waterfront in Greater Manchester as early as 2011. Since then, and perhaps because of this, more and more companies, working professionals and investors are flocking to the North, seeing the potential of the region and keen to take advantage of the cheaper house prices, the cheaper cost of living and the generally friendlier atmosphere for which the North is well-known.

From an investment perspective, this is another area in which the North has thrived. Investors are invariably drawn to the impressive rate of growth in the North, with house prices rising 5.6% in the North-West region alone, as the economic recovery in cities such as Manchester and Liverpool have had a positive impact on real estate values. The growth is not confined to these central cities however, with cities like Leeds seeing an increase of 6.3% and boasting house prices that now match the average price seen in the Yorkshire & Humberside region. As well as growing house prices, investors can also benefit from higher rental yields in the North, with average rental returns perched around 6.4%, compared with the meagre 5.5% yields offered by the once-favourable Central London area.

It appears that these statistics are not an anomaly however, as reports indicate that in the coming twelve months, house prices will continue to rise in the North at a higher level than its Southern counterpart, with house price growth rising 2.1% in the North, compared to just a 1% increase in London. The slowing of the once-buoyant London housing market is  a result of over-inflated prices and a contraction of buyer demand that has been falling for the fifth consecutive month. Furthermore, the proposed mansion tax is also causing friction for the UK housing market, with London in particular feeling the full effects of this proposal. Whilst the new taxation hasn’t been implemented yet, the sheer number of properties in London exceeding the threshold that would qualify its owners to pay mansion tax would then have a domino effect of putting pressure on an already strained market, by aiding the region wide trend of more properties staying on the market, and offers being made below asking price to avoid qualifying for he new taxation rules.

So what does this mean for the UK property market? The rise in prominence for Northern regions in terms of inward investment in its buoyant property market means that the economy is finding a way to rebalance itself by taking focus away from London, as regional cities are now able to drive more sustainable growth through their individual investment markets. The stalling house prices in the capital, coupled with the traction generated by Northern regions and their increasing growth, means that focus moving away from the capital is a good thing for all involved—the UK economy is becoming more balanced and less London-centric, investors are getting better returns on their investment, and rising rental demand in the North mean that tenants are gaining access to better, and newly built, accommodation thanks to the level of investment happening in key regional cities. The shift from London to the North has been monumental, a turning point in the UK housing market that has for so long been focussed invariably on London, and is still gaining more and more traction. The buy-to-let bubble has finally burst in London, and the aftermath of this outpouring has manifested in the North, which is fast becoming a buy-to-let hotspot in its own right. 

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