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Though the prime sector is less dependent on mortgage debt than the rest of the UK housing market, we expect the prospect of further rate rises to weigh on buyer sentiment over coming months, as the Bank of England seeks to address inflationary pressures.
Stephanie Thomson - B2C Residential Research Analyst, Residential Research
Over the past three months, the prime regional housing market has shown subdued levels of price growth, off the back of two years of strong appreciation in capital values. House prices increased by 0.3% on average, down from 1.3% in Q2. This leaves annual price growth at 5.1%, compared to 9.3% at the end of last year.
We can now say, with some confidence, that the peak of activity in the prime regional market was at the end of 2021. But the trend for larger homes and more space persists and despite lower levels of house price growth, all regions continued to see modest price growth in the three months to the end of September.
Prime regional sales activity also remains strong. Agreed sales above £1,000,000 between July and September were higher than in the same period last year and 119% above the Q3 2017-19 average, according to data provider TwentyCi. Whilst some of this is a result of properties moving into higher price bands, given the strong price growth since the beginning of the pandemic, it also highlights how resilient the market remains.
After two years of supply shortages, outweighed by strong demand, stock is gradually returning to the country market with 69% of our agents reporting an increase in stock on the market. This is likely to change the relative bargaining positions of buyers and sellers. But, agents are still reporting that larger, well presented properties are still in strong demand, encouraging competitive bidding in sought after areas.
This said, rising interest rates and the higher cost of living has already put pressure on buyers’ budgets. So, with the prospect of further increases in bank base rate over the coming months, realistic pricing will be fundamental to achieving a successful sale in the remainder of the Autumn market.
Properties in rural areas, which saw exceptionally high levels of demand throughout the pandemic, have seen the most pronounced slowing in price growth this quarter, as some buyers have refocused their search to more urban areas.
That has meant the strongest quarterly and annual price growth has been seen for family houses in suburban markets such as Loughton, Northwood, and Weybridge.
Elsewhere we are seeing the strongest demand for properties that accommodate hybrid working and provide good transport links, meaning demand remains remarkably buoyant beyond the traditional commuter zone in the three months to the end of September.
Meanwhile, north of the border, the Scottish prime market continues to offer great value despite price growth of over 17% since the beginning of the pandemic. The values of rural and village homes in particular remain on average -12.6% below their 2007 peak.
House price growth in the £2m+ country house market has also eased this quarter leaving annual growth at 5.5%, down from 7.4% in Q2. This trend has been seen across all regions and reflects the price sensitivity across these higher value, often more discretionary markets.
The private estates of the Home Counties have continued to see stronger levels of demand. These rarefied properties offer privacy and value compared to those in prime central London and therefore attract high net worth individuals seeking space outside the capital.
In particular, values in St George’s Hill increased by 1.6% over the past three months leaving total growth since March 2020 at 30.7%. But, importantly, values remain -21.2% below their previous peak in 2014 so there remains an opportunity for buyers, particularly those purchasing in foreign currencies.
Though the prime sector is less dependent on mortgage debt than the rest of the UK housing market, we expect the prospect of further rate rises to weigh on buyer sentiment over coming months, as the Bank of England seeks to address inflationary pressures.
We have already started to see more caution among buyers, whose purchasing power has come under pressure from disruption in the mortgage market. Coming at a time when more stock has been brought to the market, this is likely to mean that some of the price gains made over the past two or so years are eroded over the period of the next 12 months in softer market conditions.
The extent to which that occurs will depend on the level at which interest rates peak and the period during which they remain at elevated levels before lower inflation allows the Bank of England to bring them back towards around 2% in the medium term.
< View our latest Q3 2022 updates here
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