Even with $1 million to spend, home buyers in the British capital should brace themselves for disappointment. That $1 million will generally buy only a 350- to 400-square-foot studio apartment in prime central London, according to Ed Mead, executive director of Douglas & Gordon estate agents. Despite the price, these modest homes are snapped up by investors or those seeking a pied-à-terre. For a two-bedroom apartment in this exclusive patch of real estate, Mr. Mead estimates that a buyer would need to spend around $2.9 million. For a four-bedroom house, the typical price would be around $7.2 million. The cooling off of London’s prime central market, particularly among homes priced at $25 million and above, has been well documented. But across London, the real-estate market remains generally strong, so much so that the city’s average asking price now stands at £644,045, or $927,380, up 11% compared with the same period in 2015, according to property website Rightmove.
As a result, buyers who aspire to live in prime neighborhoods, such as Knightsbridge, Belgravia or Kensington, won’t get much for their $1 million. In Belgravia, for example, Foxtons estate agents is listing a 277-square-foot basement studio apartment with a fold-down bed in its living room, and a small kitchen and bathroom, for $972,000. A two-bedroom, two-bathroom apartment on the equally aspirational Cadogan Square in Knightsbridge, is listed for $1 million with Kaye & Carey. But the 1,211-square-foot apartment has a major catch: Like most apartments in the U.K. it is being sold on a leasehold basis, which means the sale is for a set period not permanently. And with just seven years remaining on its lease, its new owner will face a stark choice: Either relinquish the apartment back to its freeholder and walk away in 2023, or pay an estimated $2.48 million to extend its lease by 90 years. On the plus side, the real cost of buying for U.S. buyers has been assisted by currency fluctuations. In April 2014, the exchange rate stood at $1.66 per £1. Today that has slipped to $1.44, further enhancing U.S. buying power. Overseas buyers tend to be the main market for homes in prime central London. Mr. Mead estimates they make up 65% of the market. “Our overseas buyers really see these homes as an investment, which they visit perhaps two or three times a year,” he said. “They tend to hold on to their houses for a generation at least, which means stock is short which, ironically, pushes prices up.” Those priced out of prime London are turning to less upscale—but still very agreeable—neighborhoods farther out. In West Hampstead, for example, $1 million would buy a 700- to 900-square-foot space. Those who want even more space for the money are heading yet farther away to neighborhoods like Willesden Green, which 10 years ago would have been a highly unusual choice for a middle-class buyer. The ripple effect is changing the fortunes of many London postal codes, which were previously considered either very drably suburban—or downright undesirable. Buying agent Camilla Dell, managing partner at Black Brick, has noticed buyers gravitating toward Walthamstow, a traditionally working-class district 9 miles from central London. The area is rapidly gentrifying, with average house price up 15.7% in the past year, according to data from the Land Registry, the U.K.’s leading house-price index. There, a number of three- and four-bedroom houses are on the market for under $1 million, “a rarity for London,” said Ms. Dell. “We are currently seeing houses in good condition selling to aspirational buyers, and the area is popular with single professionals in their 20s and 30s, and also young couples who are looking to start a family in the next few years.” Crystal Palace, in southeast London, is another area becoming fashionable among those priced out of central London. Kinleigh Folkard & Hayward is currently listing a two-bedroom cottage, measuring 861 square feet, for $936,000. Buyers looking for a larger home should budget $1.15 million- plus for a four-bedroom house, said James Gough, director of Martin & Co. estate agents. His buyers tend to be 20- and 30-something British couples, heavily subsidized by the “bank of mum and dad,” since few Londoners can muster the 10% deposit required to secure a property in the U.K. “We regularly see deposits in excess of £100,000,” said Mr. Gough. The influx of affluent buyers into Crystal Palace, in southeast London, has seen the area change over the past five years. “Most of the old pubs are now gastropubs, and a new cafe seems to open up every week—and they are full,” said Mr. Gough. Of course, many buyers are skipping a London house hunt altogether and heading out into the commuter belt, where $1 million will still buy a beautiful home. Indeed, every minute closer to London adds £3,048, or about $4,400, to the cost of a home, according to new research by Savills. In the village of Blackmore End, a village in the county of Essex, 57 miles northeast of central London, a historic, detached, thatched cottage with five bedrooms on 1/3 of an acre is listed with Daniel Brewer estate agents for offers over $936,000. In Hereford, a rural county on the border of England and Wales, 140 miles west of London, a six-bedroom, 8,429-square-foot country mansion, with two separate three-bedroom cottages set on 2 acres is listed for about $1 million. This imposing property needs renovation, but its price is around the same as a central London studio. This article originally appeared on The Wall Street Journal.