About the author:
Anna Petrenko
Investment Consultant
AZ Real Estate
Lives in the United Kingdom
The middle class refers to a social group of people, usually with higher degree, who are engaged mainly in intellectual work and have a constant high income. These are mainly middle and senior managers, lawyers, financiers, highly qualified doctors and teachers of prestigious higher educational institutions.
In this article, we will discuss comfort-class residential properties that Londoners (typical representatives of the middle class) choose to buy. This is high-quality housing in the middle price segment in areas with developed infrastructure.
London is divided into six transport zones (linked to the metro scheme). The first zone is the historical center of the city, and the fifth and sixth zones are suburban areas located at least an hour's drive from the center.
Comfort-class housing is available in all areas of the city, but each location has its own characteristics. In the Central areas such as Westminster, Mayfair, Belgravia and the city quality housing is represented by premium class properties worth at least £800,000, which were not included in this review.
South and East London traditionally have the image of working-class areas, but their status has changed significantly since the 2012 Summer Olympics in London. In particular, in East London, old buildings that had lost their relevance were demolished, modern residential complexes appeared, and recreational infrastructure was updated thanks to the construction of Olympic stadiums. The Olympics has given an impetus to the reconstruction of this part of the city, which is still actively underway. The listed areas are located 20-35 minutes' drive from Central London or Canary Wharf, the capital's second financial cluster.
However, not everyone likes the city life, many prefer the green suburbs of London. Such areas include Richmond, Surrey, Wembley, Kingston, Walthamstow, Epping. The journey to London from these localities by train or car takes from 30 minutes to an hour and can cost a little more than moving within the borders of the first and third transport zones. This is both an advantage and a disadvantage: life outside the bustling city, among the picturesque English nature, and the garden, which many Britons to be a must-have.
The cost of such housing in the suburbs is comparable to London: in some areas it is 20-30% less for similar properties, and in areas such as Richmond and Kingsley, on the contrary, it may be even higher. However, if the distance from the city center is not critical for the future owner and they value life in a green zone, then this choice will definitely be the best value for money.
You can roughly divide the types of housing in the UK into apartments in multi-family buildings and individual houses. Both of them can be either historical or new.
The new compounds offer accommodation ranging from studios to apartments with three bedrooms (you can find more bedrooms only in premium segment). Each apartment has a living room, except for studios. Usually, it is combined with the kitchen. Most apartments are built with balconies.
Due to the relatively warm weather in London, balconies are always open and often have transparent glass fencing. As a result, in most residential complexes of comfort class, not to mention elite ones, it is forbidden to store things and dry clothes on the balcony. This prohibition Londoners do not violate: they use the balconies for pleasant gatherings, decorate with flowers and arrange terrace tables and sun loungers. But with the observance of the ban on smoking on balconies not everything is as smooth as the authorities would like it to be.
Common areas in apartment complexes include closed or accessible to non-residents courtyard territory. That depends on the specific property, whether it is with or without a garden. Most often, landscaping is open to everyone, but not everyone knows about it and uses it. A concierge service is usually one for the entire residential complex. The concierge solves all sorts of everyday problems that arise for residents, issues parking permits (permanent for residents; temporary for deliveries, guests, etc. d.), accepts packages and parcels, keeps order in the common areas of the residential complex, which may include terraces, gyms, cinemas.
Detached houses are represented by several types of buildings. The most common type is terraced houses (for ex., in the USA and in Russia they are called townhouses). They are long buildings consisting of several vertically arranged apartments, each with its own entrance and side walls bordered by other similar apartments. Usually, they have two or three floors, a living room with a kitchen (often with access to a small garden on the first floor), two or three bedrooms and a bathroom on the second floor. In fact, it is something between a house and an apartment.
Terrace houses can be either very modest, economy class (with low ceilings and relatively small bedrooms), or premium luxury estates. Side sections of terraced houses (end of terrace), where one wall does not border with neighbors, are usually valued higher, as they often allow you to expand the house or arrange a more spacious garden.
A smaller version of the terraced house is a two-family semi-detached house, the format of which is well known from country buildings: it is a detached house with two entrances, separated by a wall in the center.
But the most desirable and popular among the British buyers is a separate house, which provides the owner with complete privacy and the opportunity to expand the living space and garden. This type of housing is valued above others. If we talk about the medium segment, then, like individual houses for two families, high-quality properties of this type are located in the outskirts of London or its satellite cities.
In the legal system in the UK, due to the rich experience of legal heritage, there are two main types of property ownership – the right of ownership (freehold) and the right of long-term lease (leasehold).
The leasehold, based on land ownership, stems from the feudal middle ages. Due to the evolutionary path of changing the legal regime, it has been preserved to this day. Significant territories in the UK, particularly in London, are owned by large landowners, including the Royal family. These rights were formed hundreds of years ago and were inherited.
With the development of legislation, the rights of such owners were somewhat limited by their obligations to provide land for rent for housing construction. Eventually, it has formed a type of ownership in which the owner (leaseholder) buys a house or apartment for long term rent, pays a firm price as if they bought the property in the freehold. But in addition, they are obliged annually to pay rent for the land and service fee for the maintenance of the house.
The usual amount of land rent in London is £100-300 a year (if you own an apartment). The service fee varies significantly, depending on the house and the list of services provided. It can range from £1,500 per year for a single apartment in a house without a porter to £15,000 per year for a three-bedroom apartment with a concierge service and underground parking. This amount is not even the price limit.
The term of the lease varies from approximately 120 years (for historical buildings in central areas) to 999 years for new buildings (the so-called virtual freehold, virtual full ownership). If the remaining lease term of a property is less than 80 years, then it makes sense to update the contract for it, so that it remains liquid and attractive in the market. The renewal fee is calculated based on a combination of different factors and the market prices in the neighborhood. It can lead to 15-40% of the purchase price of the property. The shorter the remaining period, the more expensive it is to extend the lease. However, such situations are rather rare, as owners tend to extend the lease term in advance.
Contrary to popular belief, a leasehold is no less secure than a freehold, since the owner has the same rights and securities. It is only important to extend the lease term in time. When choosing between freehold and leasehold, take into account both the price and future expenses. It is noteworthy that the total share of housing in leasehold is up to 80% of the total housing stock. In London this share is higher.
The average cost of apartments in London in September, 2018 is £532,009. The terrace houses cost £704,979 on average. The range of prices for middle-class housing in the city and its suburbs conditionally starts from £350,000 and reaches £800,000, depending on the location, size and quality of the property.
To buy such housing with a mortgage for 20-25 years at 2-3% per annum, the applicant must pay in advance at least 10% of the cost of the purchased housing. After registration of the house or apartment in the leasehold or freehold, they have to pay monthly from £1,500 to £4,000 (depending on the cost).
To approve a real estate loan, the applicant's expenses for mortgage payments and necessary living expenses, such as transportation, food, child care, basic entertainment and recreation, must not exceed 50% of their net income.
The average salary in London is £35,000-40,000 a year (corresponding to the position of a manager with four to six years of experience), which after tax generates an average income of about £2,500 pounds a month. So few people can afford to buy a home in London.
In British culture the desire to become a property owner is very developed, especially in comparison with other European countries, where it is not considered "shameful" to rent a house in adulthood. Here it is literally called, "enter the property ladder". Therefore, those who have accumulated funds for a deposit or who are helped with it by, for example, parents, tend to buy at least something small in the area where they can afford to start, so that later they can go up this ladder, increasing the size or prestige of housing. For many young middle-class people, this is a definite goal, an object of aspiration.
Taking into account the problems and listed features, the UK government has developed and launched a support program (Help-to-Buy) for those who purchase housing for the first time.
The program consists of two tools. The first is shared ownership with the state: a regime in which the applicant buys from 25% to 75% of the cost of the selected housing, the rest is bought by the state, and the citizen rents this share at a price significantly (two to three times) lower than the market price. Thus, after the purchase is completed, the applicant's monthly expenditure on mortgage payments and rent for the unredeemed share of their home will be significantly lower than renting a similar home on the open market.
The future owner needs to have funds for the first payment for the purchased share of the house or apartment. At the same time, the applicant must have a family income of no more than £90,000 pounds to qualify for the program.
The second option of the state program to support the purchase of housing is to ease the buyer's financial burden on making the first installment and mortgage payments (equity loan). The program provides that the cost of the acquired asset should not exceed £600,000, and the price threshold is set the same for England and for London. The buyer must pay only 5% of the cost of their future home; up to 20% for five years without interest for the use of funds will be provided by the state, and the rest will be issued by the bank on mortgage terms.
The interest-free loan issued by the state for the purchase of housing in London can be up to 40%. At the end of the first five years during the entire loan term (up to 25 years), the owner is required to start paying for the use of the state loan. The current interest rate is 1.75% and is subject to annual adjustment for the value of the consumer price index.
There are no one-time payments or commissions for issuing such a government loan, but it is noteworthy that for administrative support of the loan by a specially created state institution, your bank account will be debited £1 on a monthly basis until full repayment.
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