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We anticipate the prospect of further rate rises to weigh on domestic buyer sentiment over the coming months, as the Bank of England seeks to address inflationary pressures. This is likely to outweigh any impact from a very modest cut in stamp duty.
Frances McDonald - Associate Director, Residential Research
Despite increasing economic headwinds, the number of sales of £1 million-plus homes across London in September this year was more than 50% above the pre-pandemic norm for the same month, according to Twenty-CI.
This said, we have started to see more caution among buyers, given pressures in the global economy, the prospect of further interest rate rises, and disruption in domestic mortgage markets. As a result, the market has started to become increasingly price-sensitive.
Prime central London residential values remained flat in Q3, leaving annual growth at just 2.3%. Values of £10m+ homes have performed somewhat better over the past 12 months, rising by 4.3%, as international buyers, particularly those from North America and the Middle East, have sought to take advantage of the value on offer.
For those buying in US dollars, average prime central London prices were discounted by -45% compared with the 2014 peak, during September. That continued to support quarterly price growth of around 0.5% in the multi-national submarkets of Belgravia and Knightsbridge, which have previously lagged behind traditionally more domestic central London markets such as Notting Hill and Holland Park.
Elsewhere across London, prime residential property prices rose by 0.7% over the quarter, reflecting low levels of available stock and a desire among buyers to lock into prevailing mortgage rates before further increases. That left annual price growth at 4.3% - which is slightly down from its peak in March of 4.7%. However, there remains a distinction between the annual price growth seen for flats (2.9%) and houses (5.9%). In part, this is a hangover of the response to the pandemic, but also it reflects higher levels of housing wealth that buyers of houses have accumulated during their period of home ownership.
Increasingly there is a sense that the balance between opposing market forces is changing. By the end of September, rising interest rates were cited by over half (55%) of Savills agents as the biggest concern for London buyers, overtaking lack of stock (30%) for the first time this year. As a result, the majority of agents (82%) say that they have seen buyers’ budgets decrease over the past three months.
The prime housing markets of north and east London, including Hackney (3.6%) and Shoreditch (1.7%), were the strongest performers in the quarter. These parts of London were typically less favoured by buyers during the pandemic ‘race for space’ but have recently benefitted from a return in demand for urban living. By contrast, values in the leafier prime markets of South West London rose by just 0.3% in the quarter, the lowest quarterly price growth was seen in this region in two years.
While capital value growth has been subdued, rental growth in London’s prime property markets reached 14.0% in the year to September 2022. That is the highest growth since Savills index records began in 1979. Rents increased by 3.3% in the three months to the end of September, a fourth successive quarter where growth has exceeded 3%.
In the capital, the number of homes available to rent remains at a record low, not only underpinning strong rental growth but also driving applicants to look further afield. Indeed, 62% of Savills London agents reported at least half of their new applicants searching across multiple locations.
Prime markets are typically driven more by wealth generation and equity, rather than debt, and are better equipped to deal with recent rate rises.
But that is not to say that they are immune to financial uncertainty and as economic headwinds continue to gather, we can expect to see some reduction in budgets. More specifically, we anticipate the prospect of further rate rises to weigh on domestic buyer sentiment over the coming months, as the Bank of England seeks to address inflationary pressures. This is likely to outweigh any impact from a very modest cut in stamp duty.
This will ultimately mean that we see the heat come out of the domestic prime market in the short term, and a further delay to the long-awaited recovery of prime central London.
But, recent volatility in financial markets means that there is a significant opportunity for overseas buyers who we have seen gradually return to this market.
< View our latest Q3 2022 updates here.
For more information, please contact your nearest London office or arrange a market appraisal with one of our local experts.