Recent further increases in the cost of mortgage finance are likely to put further pressure on prices in the more mortgage dependent parts of prime London
Lucian Cook, Head of Residential Research
Despite increasing concerns over rising interest rates, prices of prime property in London remained remarkably resilient in the second quarter of 2023. On average, prices fell by just -0.2% in the quarter, meaning that in the past year, values have slipped by a relatively modest -1.0%.
That compares to a -3.5% annual price fall for prime properties outside of London, reflecting a continued refocus of demand back to the capital.
But this average continues to mask differences between more debt-driven and equity-rich parts of the market.
While prices of flats in central London held their own in the second quarter of the year, elsewhere across the prime markets of London, they fell by an average -0.6% in the weakest-performing sector of the market.
Prices have been under the greatest pressure where younger homebuyers and investors typically make up the biggest proportion of demand. That has left the housing market in areas such as Clerkenwell, Shoreditch and Victoria Park particularly price sensitive, whereas more mature markets such as Mayfair, Westminster and Marylebone have proved hardier.
The variation in performance is also reflected in movements in different price bands. Higher-value properties, where there is much less reliance on debt to buy a property, have typically seen the least downward pressure on prices over the past year.
However, there remains a sense of caution at the very top end of the central London market, with a continued lack of urgency among international buyers who have been relatively slow to return to the market despite the value on offer from a historical perspective. A combination of sterling’s appreciation against the dollar, macroeconomic pressures on global wealth generation and requirements for greater transparency around overseas ownership have contributed to this position.
Meanwhile, rental values of prime London properties have continued to rise, increasing by 1.4% in the three months to the end of June, meaning that annual rental growth, which peaked at just short of 14% in September, remains as high as 6.7% on average. In contrast to the sales market, this tends to be highest for smaller properties as occupational demand shifts towards renting in the face of higher mortgage costs.
Recent further increases in bank base rate and consequently the cost of mortgage finance are likely to put further pressure on prices in the more mortgage-dependent parts of the prime market over the remainder of this year and into next.
With lenders agreeing a package of measures to alleviate some of the financial pressures upon existing borrowers, we do not expect to see a significant increase in stock coming to the market. That reduces the downside risks in this part of the housing market. However, we do expect to see potential buyers work to lower budgets and more caution among investors who are facing greater levels of regulation.
While the increased cost of mortgage finance is less relevant in markets such as prime central London, underlying macroeconomic uncertainty is likely to further delay a recovery in prices, that seems long overdue.
And so while the impact of higher mortgage costs will vary across the market, all of this indicates that the market will remain price sensitive until we see a meaningful fall in inflation and the prospect of interest rates gradually being reduced.
< View our latest Q2 2023 updates here.
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