Four months on since the decision to leave the EU, the prime London housing market presents a number of challenges to buyers. But with challenge comes opportunity.
Savills research has identified five different types of buyer whose decisions will shape the market over the next five years:
Typically found in the most expensive streets of prime central London, the wealthiest trophy hunters have been most affected by recent tax changes. However, given their wide international profile, they also have the most to gain from the lower value of sterling.
Despite a volatile market over the last five years, we expect London to continue to be a safe haven globally, although increased stamp duty, capital gains and inheritance tax liabilities is likely to mean that trophy hunters will only focus their activity on the very best addresses.
The mainstay of the more domestic family markets such as those of prime South West and West London, these buyers have seen broadly flat prices over the last two years though many have built up good levels of equity.
Higher stamp duty rates and tighter mortgage regulations are making it hard to borrow enough to upsize. On the other hand, current low interest rates make trading up the ladder more affordable, as buyers are able to secure good fixed rate or tracker mortgages, without overstretching themselves on loan-to-income multiples.
Over the last 10 years, investors in prime London have seen strong capital growth but progressively lower income yields, with gross income yields now standing at 3 per cent in central London. An additional 3 per cent stamp duty on investment properties and modest prospects for rental and capital growth, will make investors increasingly selective in what and where they buy.
However, the low cost of debt and comparatively low returns on other assets will present buying opportunities. Overseas investors will therefore act as a key barometer of future turning points in the prime market.
The value gap between London and the suburbs, though historically very wide, is now narrowing. Suburban and affluent urban locations in the commuter zones are now showing stronger price growth than prime London and are likely to continue to do so.
There is still relative value to be had in the countryside, those selling up in London to take advantage of the value gap and gain more space must keep their asking prices realistic.
Affluent first-time buyers
Typically now in their mid-30s rather than 20s, over the last 5-10 years these buyers have expanded their search into London’s emerging prime markets. With the Bank of England having cut interest rates to an all-time low in August and a generally less competitive environment from investors, there will be opportunities for this group to get a foot on the housing ladder in the near future, providing they can secure a deposit.
However, in the next five years we expect the extent to which affluent first-time buyers explore new markets to slow down, and for their activity to be concentrated on locations that have already been pioneered.