Residential Property Focus

Residential Property Focus
A Period Of Adjustment

5 November 2015, by Sophie Chick

The prime regions are poised for the ripple effect once stamp duty changes are absorbed.


Understanding what is happening in the prime housing market at the moment is not easy. On the one hand, the economy is improving, wages are increasing, interest rates are still low and there is political certainty for the next five years. On the flipside, mortgage regulation limits the amount buyers can borrow and the new stamp duty rates are weighing down the top end of the market.

The capital

Across prime London, prices rose by just 2.3% in the six months to the end of September 2015, leaving them effectively the same as a year ago. This was largely due to the price falls that were triggered immediately after the new stamp duty rates were announced in December 2014.

However, performance is not uniform across London. Properties at the top end of the market, which saw the biggest increases in stamp duty, have seen falls over the past year of a similar scale to the increased transaction costs. For example, properties priced over £5m have seen annual falls of -4.7% compared to an additional stamp duty rate of +4.1%.

At the lower end of the prime London market, prices are still increasing albeit at a slower rate than last year. For these properties, the increased mortgage regulation is a key consideration.

For those moving up the housing ladder in the middle tiers of the prime London market, higher levels of stamp duty over £1m will have eroded the equity built up in a previous home making them more reliant on mortgage borrowing. This is at a time when mortgage regulation reduces high loan-to-income lending and makes it difficult to borrow against bonuses.

Importantly, the slowing price growth across the prime London market also reflects a market that had seen five and a half years of sustained growth prior to the tax changes, which leaves little capacity for prime growth in the short term.

"We expect the trend for prime urban living to continue, fuelled by London buyers"

Sophie Chick, Savills Research



Ripple effect

In the London suburbs and its commuter belt, the summer of 2013 marked a turning point as price growth returned to the area, following two and a half years of very little price movement. It seemed as though it was finally the time for the much anticipated ripple of wealth to leave the capital and flow to the regions.

Price growth increased and by June 2014 annual growth had reached 7.1%. However, since then the rate of growth has slowed, partly due to the uncertainty surrounding the election but also because of the stamp duty changes referred to before.

This leaves prime property prices in the London commuter belt just 6.6% above their 2007 levels compared to 36.8% in London. Theoretically, this indicates that there is potential for significant price growth once the ripple effect is restored. However, this is unlikely to occur until the London market is moving again.

Regional economies

Beyond the London commuter belt, the prime property market is not as reliant on London and instead depends on the wealth generated in the local economy and in some cases second home buyers. It is also less affected by the SDLT changes as prices on the whole are lower. Prime property values in these regions are still significantly below where they were in 2007, ranging from -8.0% below in the remainder of the south of England to -22.3% below in Scotland.

Economic growth over the past 10 years has been largely dominated by London. Although over the next 10 years London is still forecast to outperform, all regions are set to see significantly stronger economic growth, particularly in the South East, East and North West.

Looking ahead

Although there are early indicators that sentiment is beginning to pick up across all the prime regions, there remains a lack of urgency among buyers. In part, this stems from a relatively sluggish market in the capital, which is creating a lack of upward pressure on prices.

In London, the fundamentals of wealth generation support medium term price growth. However, this is likely to be muted in the short term as the market, which currently looks fully valued and fully taxed, adjusts to a new fiscal and regulatory backdrop.

Beyond London, the relative value offered in most prime regional markets compared to the capital is likely to underpin price growth. However, sellers need to remain realistic in terms of pricing. We expect the trend for urban living to continue as this is where London buyers are likely to move to in the capital’s surrounding commuter belt and where the wealth will be created further afield.

The Prime Marketplace

Following the flow of prime housing wealth


The Prime Marketplace

Source: Savills Research


Receive the latest research

Retail Properties