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London's hottest home markets suffer price cuts

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On the less fashionable fringes of London, home sellers are quickly finding out just what the market can bear.

[LONDON]On the less fashionable fringes of London, home sellers are quickly finding out just what the market can bear.

Buyers fleeing the capital's costly center turned peripheral boroughs into London's hottest property markets. Now, more sellers in those areas are being forced to cut their prices after values quickly outstripped the spending power of the average buyer.

The number of asking-price reductions is growing at the fastest rate in outer London boroughs such as Barking & Dagenham and Newham. Discounts have also increased in areas such as Tower Hamlets in the east and Croydon in the south.

"Peripheral areas, which buyers turned to when inner London became too expensive, have seen considerable inflation recently and reached a point where affordability is stretched," said Neal Hudson, founder of researcher Residential Analysts Ltd. "Before, people got around it with longer-term mortgages, but the limit has been reached."

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London home prices surged 82 per cent in the past decade - led by central areas such as Kensington & Chelsea and Westminster - outpacing wage growth and testing the limits of what buyers can borrow. That led purchasers to seek discounts in the city's lower-cost outer districts, causing values to soar.

The percentage of sellers cutting prices in April rose the fastest in the eastern borough of Barking and Dagenham, where 28 per cent of properties had reductions, up from 21 per cent in January, according to data compiled by real estate listings website Zoopla. Newham and Redbridge had the second and third-largest increase of sellers lowering prices, the data shows.

"People are struggling with affordability and the problem is especially acute in London," said Ian Sutcliffe, chief executive officer of Countryside Properties Plc. The Brentwood, Essex-based homebuilder has pushed down the average cost of its new homes by 13 per cent in the first half from a year earlier.

Mr Sutcliffe says that the bulk of demand for London homes comes from people who work in the capital and can afford to spend between £400,000 ($715,000) and £600,000. The current average price is £680,607, according to Zoopla, while the average Londoner's salary is £34,762.

"Before, people were moving to areas they wouldn't necessarily want to live in because it was all they could afford," said Paula Higgins, chief executive officer of HomeOwners Alliance, a consumer organization for U.K. home buyers. "Now that prices in those places are becoming out of reach they are just giving up altogether on the idea of buying." "The increase in values in these outer boroughs was definitely underpinning price growth for London as a whole," said Lucian Cook, head of residential research for Savills Plc. He estimates that prices in the capital will stagnate this year for the first time since 2009 before rising 3 per cent in 2018. "What we have seen already with discounts in the higher end market is gradually coming full circle and extending to the more affordable areas." Low interest rates will limit the impact of Brexit on London's property market, but prices are already turning south, according to Ailbhe Tobin, an investment associate at J&E Davy Holdings Ltd. Values need to correct after the average price-to-earnings ratio for first-time buyers hit a record high of 10.1 at the end of last year, she said.

"Some heat needs to be taken out of London property," she wrote in a note to investors. "Even if prices fall by 20 per cent this would still leave them looking expensive at eight times average income."