For the best part of the last 18 months, it’s been almost impossible to open a UK newspaper that hasn’t had at least one article about the craziness of the London property market. According to the various journalists concerned, the market was overheating back in the spring and summer of 2013, so as prices are now somewhere around 19% higher than they were then, boiling point was reached and passed a while back.

And it’s not just the past 18 months. Back in July 2011 the BBC quoted economist Jonathan Davis talking about the overpricing of London property – he said at the time “London and South East transaction numbers had collapsed and prices were set to follow”.  Marvellous punditry – according to the Land Registry the average price of a London property at that time was £335K – it’s not been that low since, and by August 2014 had risen to £467K.

On 23rd October, Foxtons shares tumbled on the back of a poor last quarter, with sales commission down 7.8% on the quarter ended 30 September 2013. In the previous week, RICS reported London prices were beginning to fall.  And subsequent to that the FT reported that volumes in the prime Central London market fell by a third in the July to September quarter.  So all these journos can pat themselves on the back – they called it right after all. Maybe a bit late, but hey! – they can sit back and bask in self-satisfaction.

Or can they? Aren’t there one or two special factors coming into play?

First and foremost, there’s an upcoming general election, with a strong likelihood of Labour being returned to power. And Labour’s just announced its Mansion Tax, basically a postcode tax on Central London.  In the short-term, the threat of this as-yet rather ill-defined tax hits sentiment at the top end of the market.  In the longer term, should Labour get in, there’s always the risk that having invented a new tax, they’d expand its reach by lowering the value at which it kicks in.  That impacts not only the top end, but also those properties that might be dragged into the net.

Second, we’re about to enter a further period of decline in the Eurozone. Optimism across the continent is on a downward curve.  Allied to that, the Chinese economy is slowing, and there’s the build-up of tensions between Russia and the West.  Couple that with the strengthening of sterling against both the Euro and the Rouble, add in the Enveloped Dwellings regime, there’ll be fewer non-resident investors in the London property market.

So where’s the market likely to be heading over the medium term?

The London residential property market responds to two principal drivers – overseas investors who drive the top end of the market, pulling the rest in its wake; and UK residents working in the capital and wanting to live there. Currently, both special factors mentioned above are weighing down on the overseas investor market – but they don’t affect the UK residents market.  Hence the reduction in volumes at the top end isn’t noticeably affecting either price or volume in the rest of the London market.

For UK residents the core issue underlying property prices is affordability. The vast majority of property acquirers are buying a home to occupy, a few are buying to let to obtain a better return than they can on cash.  Affordability is not the headline price.  Affordability comprises the following principal ingredients, in descending order of importance:

For occupiers

1. the size of the required deposit,
2. the cost of the monthly mortgage,
3. the cost of renting an equivalent property, and
4. the possibility of building up personal wealth by way of equity build-up.

For UK investors

1. the ability to raise sufficient cash to obtain a buy-to-let mortgage at relatively poor Loan to Value ratios
2. the likelihood of generating sufficient rent not only to cover all ongoing costs including finance but also to provide a return above and beyond what they can earn on their cash
3. the likelihood that the undersupply of property will continue for the foreseeable future

So yes, the froth may have come off the top end of the market. Fewer foreign buyers, leading to lower volumes and some degree of price adjustment by those who have no option but to sell.  But below the top end, that froth doesn’t exist and won’t exist whilst there are more people wishing to live in London than there are properties to accommodate them.  It’s good ol’ supply and demand.  If people can’t afford the deposit, they have to continue renting … thus sustaining the B2L market.

The medium term outlook? Lower volumes at the top end, with some degree of price correction for those that sell, at least until the General Election in May 2015.  Further down the scale, no noticeable change, and none likely until something major happens on the supply side