Prime housing markets remain price sensitive but risks have been overplayed

26 September 2017

 Having seen double digit falls since 2014, house prices in London’s prime central locations are beginning to find a level.  The rate of falls slowed again in the third quarter of 2017, but uncertainty over the impact of Brexit points to two further years of no growth, according to real estate adviser, Savills, which today released new prime market forecasts.

Thereafter, when uncertainty clears and central London’s prime residential real estate again represents identifiably good value, prices will bounce, though not to the same extent as in previous cycles, the firm says. 

Five year price growth to the end of 2022 is expected to total 20.3 per cent, significantly outperforming wider prime London, a market that is more dependent on domestic buyers employed in the financial and business services sector for whom mortgage affordability is more of an issue. Average growth in these markets is projected to total 10.2 per cent.

Beyond London, the UK’s prime regional markets will continue to follow the pattern of the past three years in showing little price movement.  However, while London’s suburbs and extended commuter belt - the markets most dependent on equity flows from the  capital - will wait until 2019 or beyond to see price growth, other regional markets are expected to see marginal price rises next year, albeit some remain below their 2007 peak.

 

Recent Performance to end September 2017

PRIME   MARKETS

Q 3 2017

Year to end Sept 2017

Since Sept 2014

Central London

-1.0%

-3.2%

-15.0%

Other London

-1.3%

-2.1%

-4.7%

Suburban

-1.0%

-0.5%

-0.4%

Inner Commute

-0.2%

0.0%

+3.1%

Outer Commute

-0.1%

0.0%

+6.2%

Wider South of England & Wales

0.7%

2.2%

+8.2%

Midlands/North

0.4%

1.8%

+3.8%

Scotland

0.4%

1.3%

+2.0%

Source: Savills prime market indices

 

Savills 5-year forecasts for 2018 - 2022

PRIME MARKETS 2018 2019 2020 2021 2022 5 year (2018-22)
Central London 0.0% 2.0% 8.0% 5.5% 3.5% 20.3%
Other London 2.0% 0.0% 5.0% 4.5% 2.5% 10.2%
Suburban 0.0% 0.0% 4.5% 4.5% 3.0% 12.5%
Inner Commute 0.0% 2.0% 4.0% 4.0% 4.0% 14.7%
Outer Commute 0.0% 1.0% 5.0% 4.5% 4.0% 15.3%
Wider South of England & Wales 1.0% 1.5% 3.5% 3.5% 4.0% 14.2%
Midlands/North 1.5% 1.0% 3.0% 3.0% 3.5% 12.6%
Scotland 1.5% 1.5% 3.0% 3.5% 3.5% 13.7%

Savills prime market forecasts, September 2017

 

Global Impacts

While projected five year growth of 20 per cent may look ambitious in the current climate, it represents a departure – likely permanent – from the historic trend, Savills says, which saw average annual price growth of 5.7 per cent above the rate of inflation between 1979 and 2014.

Yolande Barnes, head of world research at Savills explains: “This was a period that saw London transformed from a purely domestic market in the pre Thatcher years, before deregulation of the financial sector, to one of the world’s leading global cities. This rocket-fuelled promotion phase cannot be repeated, but London can retain its position amongst an elite group of cities.  We believe it will, though future returns will reflect London’s continuing low-risk world city status.”

In future, the higher costs now associated with buying a high value home, and the greater exposure to capital gains tax and inheritance tax for overseas owners will continue to moderate price growth regardless of the Brexit outcome.

“But we think the risks regarding London’s position as a global commercial centre have been overplayed,” says Barnes.  “Whatever the challenge from other cities, London will almost certainly remain a key global financial centre and develop as one of several European hubs for the growing tech sector.  Its prime markets will therefore benefit from new domestic wealth generation as well as attracting wealthy international buyers.”

Prime central London detail

Prices in prime central London slipped by -1.0 per cent in the third quarter of 2017, taking annual falls to -5.2 per cent.   Values are now -15.2 per cent below their 2014 peak, just ahead of the major stamp duty reform of December 2014, though most who bought before 2012 should be showing gains.

“Uncertainty fuelled by Brexit and a weakened government mandate since the June election, means sentiment is fragile,”  says Lucian Cook, Head of UK Residential Research. “Where sellers are pricing for today’s market, transactions are proceeding, but the market is highly discretionary and price growth is not anticipated until there is clarity over the UK’s future relationship with Europe.

Wider prime London

The wider prime London and regional markets have a far more domestic buyer profile and price growth will be more modest as a result. 

“While the broader prime London housing markets may be impacted by equity flows from the core central zones, they are less affected by the concerns of international buyers,” says Cook.  “They are though more influenced by trends in the high value employment sectors such as finance, banking and tech, as well as the availability and cost of mortgage finance - all factors that will constrain price growth.”

Sellers in these markets have been slower to accept the realities of the current market, but this is changing. Analysis by Savills of TwentyCi data shows that in the year to the end of June 2017, there had been 122 price cuts for every 100 properties sold for more than £1million. 

This trend has translated into year to date price falls of -2.1 per cent in the wider prime London market, according to the Savills index. This is expected to continue into next year, with falls of -2.0 per cent in 2018 before levelling out in 2019, and returning to growth in 2020.  The five year forecast is more subdued than for prime central London, at 10.2 per cent.

UK prime regional markets 

Beyond London, average prime regional values now seem to have levelled off and some will see marginal price growth next year. 

The flow of wealth out of the UK capital plays a significant role in forecasts for the prime commuter zone, which will be slower to see price growth.  But over a five year period, as London ticks up, these markets will likely be the strongest regional performers, with growth peaking at 15.3 per cent in the outer commuter zone, some 30-60 minutes outside the capital.

“Here, the price gap is key, particularly for Londoners looking for more space, and should help reduce price sensitivity in these markets,” says Cook.  “For example, while £1 million will buy just over 1,200 sq ft of home in Wandsworth, it will get you around 2,000 sq ft in Sevenoaks and over 2,400 sq ft in Bath.”

Further from London, much depends on more general economic drivers and the extent to which they support a wider ripple effect.  The wider south of England, Midlands, North of England and Scotland have all seen small average price increases this year and that will continue into 2018. 

All will undershoot London’s commuter belt over the five year period, but see marginally stronger growth than outer prime London, suggesting that the value gap is stretched to its maximum.

 

 
 

Key Contacts

Lucian Cook

Lucian Cook

Director
Residential Research

Savills Margaret Street

+44 (0) 20 7016 3837

 

Sue Laming

Sue Laming

PR Director
Press Office

Savills Margaret Street

+44 (0) 20 7016 3802