London Property Market Strengthens FurtherThe average price of a UK home increased by around 1.3 per cent in August, the biggest monthly rise in two and a half years, led by gains in London, according to the latest figures released by Nationwide.

Property prices are being driven upwards by a high level of property investment activity as investors seek to take advantage of high rental demand, particularly in the capital.

With many would-be first time buyers struggling to raise the necessary finance required to buy a property, a high number of people are being forced to rent property instead, pushing rental values higher in the process; an attractive proposition for shrewd investors looking to cash-in.

Steve Hicks, managing director of Genie, says that the biggest problem for first-time buyers is the need to save for a deposit on a mortgage, which is currently almost unachievable for many who are struggling with their day-to-day needs. Yet, the increase in average house prices will make it harder still.

“It is already incredibly difficult for people to get on that first rung of the housing ladder so news that average house prices are on the increase means that it will be even harder, said Mr Hicks. “Still the fact remains that the average deposit for a first time buyer in the UK currently stands at £26,000 up from £12,000 five years earlier, an increase of 117 per cent.”

Investor demand for homes in London is being significantly boosted by international homebuyers, many of which are benefitting from a favourable exchange rate.

Estate agents Cluttons report that compared to the price peak in the third quarter of 2007, home buyers from the Far East are now benefitting from price discounts of as much as 60 per cent and home buyers from the Middle East as much as 30 per cent, as a result of the weakened sterling currency. With no immediate appreciation in the value of sterling anticipated any time soon, this advantage looks set to continue for the foreseeable future.

Sue Foxley, head of research at Cluttons, said: “International buyers have long bolstered demand for property in the capital, pushing up prices as the supply shortage continues.”

Cash buyers, both domestic and foreign, are still very much in evidence in popular London markets, such as St Johns Wood, due to the fact that demand for property to rent in St John’s Wood is far outstripping supply, pushing rents higher in the process.

Aside from good rental returns, the lack of houses and flats to rent in St John’s Wood is also contributing to higher property prices, as competition between investor landlords intensifies in a bid to plug the rental housing shortage in the area.

Adam Feather, managing director of local estate agents Robert Anthony, said: “The continuing imbalance in demand and supply has created a competitive market in St John’s Wood where many properties receive multiple offers and subsequently prices are pushed up.”

Of course, it is not just St John’s Wood that is attracting enormous investor demand.

High demand for rental homes in surrounding areas from people looking for a flat or house to rent in Regents Park, Primrose Hill, Baker Street, Swiss Cottage and Finchley Road, among other highly desirable local areas, is also proving alluring for investors. But with supply highly restricted, competition among homebuyers is fierce.

“Clearly, both owner-occupiers and investors are unwilling to part with what may well be the only asset they hold that is actually increasing in value,” said Andrew Ellinas of leading estate agents Sandfords.

Until there is a notable rise in the supply of homes coming onto the sales and rental markets, property values will almost certainly continue to increase further, making it even harder for first-time buyers to gain a foot on the housing ladder.