Our forecasts for price movements in the mainstream housing market are typically driven by projections of affordability, primarily for mortgaged buyers. As we have set out on The stories behind our forecasts, these have regard to where previous price growth has left pricing in each region, as well as the effect of the economy on household incomes and, critically, the future cost of mortgage debt.

But not all markets are the same. Demand for prime housing is more affected by the creation and flows of wealth and has been more impacted by various tax changes over the past five years.

Consequently, there can be significant elasticity between the two. This is particularly apparent in London. Here, despite a significant recent slowing of the market, mainstream prices have risen by 15% during the past five years, while in the prime markets of central London, values have fallen by more than this figure.

This elasticity is likely to be a feature of the market over the next five years, although, this time, the prime market of central London (which makes up a small proportion of the London market as a whole) is expected to substantially outperform its mainstream counterparts.

Prime central London

At the end of Q3 2019, prices in prime central London were 20.4% below their 2014 peak, the scale of falls having converged around this figure across all price bands. For a US dollar buyer, that left prices 42% below their peak, given the depreciation of sterling.

With central London looking relatively good value in both a global and historical context, this normally would have triggered a recovery. However, this has been delayed by political uncertainty, both in relation to Brexit and in Westminster.

The general election is likely to delay any recovery further, even though there would need to be a substantial change in the polls for the possibility of a majority hard left government to become a reality.

A Conservative government with a slim majority in parliament, combined with a bottoming out of sterling, would provide the platform for a recovery in this market.

We would expect that recovery to be weaker than in previous cycles due to the higher tax environment, prospect of gradually increasing cost of money and the fact that London has matured as a global city and financial centre.

Given the tax receipts that it would put at risk, we believe there is only a limited possibility of a significant stamp duty cut in the short term at least.

_{Read the articles within Residential property forecasts below.}