Market remains price sensitive
Since 2014, prices of prime housing in London have gradually declined, which has continued at the beginning of 2018. In the first quarter of the year, values slipped by a further 0.8% on average, and are now 9.8% below their 2014 peak.
In high-value markets, this has been even more marked, with values in central London down 16.9% over almost four years. Marylebone is the one market to buck the trend, with demand spurred on by the value it offers compared with other prime central locations.
Elsewhere in the prime London markets, higher-price properties have been more affected than lower-value ones (see below). This has favoured the markets east of the City.
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FIGURE 1 | Prime London house price movements | Since the 2014 peak, the price of higher-value properties has been more affected than lower-value ones
Source: Savills Research
Market drivers
The relatively long drawn-out nature of this downturn is quite different to the rapid corrections seen in the wake of the credit crunch and in the early 1990s. This reflects the factors at play.
First, taxation has been part of the picture, in the form of stamp duty and exposure to capital gains taxes for overseas buyers. Political and economic uncertainty have undoubtedly played their part, too. Insecurity regarding the UK’s political landscape has offset the realisation that Brexit is unlikely to mean that London loses its status as a global financial centre.
This has led to a lack of urgency among buyers. Investors, in particular, have become increasingly dominated by those who take a long-term view of the London market’s attributes.
In the more domestic markets beyond the centre, mortgage regulation and the threat of increasing interest rates (though gradual and off an historically low base) have put a cap on the financial clout of some buyers. Across London as a whole, the ratio of loan to household income for buyers is around four – close to the four and a half at which lending becomes rationed.
Defining good value
The question is: at what point the market looks sufficiently good value to see the gradual fall in prices cease? Then, what will be needed to restore buyer confidence so that it becomes much less needs-based?
In central London, price falls are already of a similar scale to the two recent downturns mentioned earlier, which limits some of the downside risk. This indicates that further significant downward pressure on values is unlikely unless Brexit negotiations take a turn for the worse, interest rates rise more rapidly than predicted, or a swing of the political pendulum makes wealth taxes appear more likely.
That said, a rapid recovery in prices is likely to be precluded by the very factors that caused prices to adjust – especially as prices in London’s mainstream market slipped into negative territory at the end of last year (according to Nationwide).
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FIGURE 2 | Price trend | Further downside risk may be limited as price falls are now of a similar scale to recent downturns
Source: Savills Research
Outlook
We expect the market to remain price sensitive for the remainder of this year and 2019. This price sensitivity has suppressed transaction levels, though not to the extent suggested in some quarters.
Data from HMRC and the Land Registry indicates that in the four boroughs of Westminster, Kensington and Chelsea, Hammersmith and Fulham, and Wandsworth, sales of £1 million-plus properties are within 20% of their 2014 level.
In theory, growing acknowledgement that the market is likely to be pretty flat over the short to medium term should bring buyers’ and sellers’ expectations more in line and bring more liquidity to the market. Successful Brexit negotiations would also set a platform for a return to price growth.
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FIGURE 3 | Prime prospects | We expect the market to remain price sensitive through 2019
Note: These forecasts apply to average prices in the secondhand market. New build values may not move at the same rate
Source: Savills Research