Prime London house prices – Q4 2022

Central London’s performance has been relatively robust during 2022, both in terms of pricing and transactions. But during 2023, the UK is expected to teeter on the edge of a recession

Frances McDonald, Associate Director, Residential Research

1. Mortgage-dependent markets begin to see prices ease

The prime markets of London are experiencing a growing divergence between heavily mortgaged and equity-rich segments as interest rates rise.

On average, prime prices across London fell by -1.3% during the final quarter of 2022, leaving them 1.5% higher than they were a year ago and 3.9% above their pre-pandemic level. But, as is often the case, there has been considerable variation in performance for different price points and locations, reflecting the varying drivers of demand across London markets.

Lower price bands have so far been most impacted by a tougher economic outlook and rising interest rates. The price of prime London properties valued below £750,000 fell by -2.0% in the three months to December. Meanwhile, larger, higher-value homes worth more than £2,000,000 fell by a more modest -0.7%, and those at the very top end, valued at over £10,000,000, fell by -0.4%.


2. Traditional prime central London back on top

Less reliance on borrowing will cushion the most expensive London markets from affordability concerns governing lower-value areas. Prime central and North West London experienced the smallest falls of -0.6% and -0.2%, respectively, during the fourth quarter.

This, together with the value on offer and an improved return of international buyers, means local areas such as Belgravia, Knightsbridge, Mayfair and St John’s Wood have been among the most robust over the final quarter of the year. These markets tend to be more driven by flows of global equity and, although not immune, they are dictated less by domestic economic volatility.

This is further evidenced by a record number of sales above £5 million across London in 2022. There were 606 sales above this threshold and activity remained strong right through to the year end. A total of £6.57 billion was spent on these homes, 13% more than in 2021, the previous high point for total spend.

3. Family homes in demand but interest rate hikes bite

Price growth across South West and West London saw the greatest slowdown with falls of -1.4% and -1.9%, respectively, during the fourth quarter. This swathe of outer prime London has a larger proportion of highly leveraged family home markets, and around two thirds of prime buyers use a mortgage.

But these leafy suburbs have been more popular since the start of the pandemic and have been among the top performers. Chiswick, East Sheen, Richmond and Wimbledon have seen double-digit price growth between March 2020 and December 2022, despite recent falls in value.

Investors and young professionals, who are often more reliant on mortgages, make up a greater proportion of buyers in North and East London and so prices have fallen by an average of -2.2%. Canary Wharf, which is reliant on how financial markets are performing, has seen prices fall more significantly, whilst Victoria Park has remained more robust.



4. Outlook: Central London expected to continue outperforming

Central London’s performance has been relatively robust during 2022, both in terms of pricing and transactions. But during 2023, the UK is expected to teeter on the edge of a recession. As interest rates continue to rise, weak sentiment and price falls from the wider prime markets across the UK is likely to feed into central London.

World GDP growth is also forecast to slow this year, and the US and eurozone are expected to suffer similar pressures as the UK. But this is less of a concern in other emerging economies such as in the Middle East, India and, to some extent, China.

As such, we are forecasting values to fall by -2.0% by the end of 2023. Domestic instability is also likely to temper growth in 2024, but longer term, growth will be underpinned by the value on offer, a lack of supply compounded by fewer new build alternatives, and falling levels of inflation and interest rates.

By the end of 2027, we expect average prime central London values to increase by 13.5%.


5. Outlook: Rising rates will be felt more keenly across mortgage-dependent outer prime London

However, in line with the performance seen during the final quarter of 2022, the rising cost of debt is likely to have a much more profound effect across outer prime London.

Although the top end of the market is less reliant on borrowing than the mainstream, it is not immune to interest rate rises. Wider economic and cost of living pressures will also impact on buyers’ budgets. So we anticipate that prime prices will fall by an average of -7.0% by the end of 2023.

There is no doubt that new entrants to the mortgage market and existing borrowers coming to the end of a fixed-term mortgage over the next 18 months or so will face a sharp rise in costs. Some may need to temporarily dip into their savings or cut back on discretionary spending to cover these increases, and as the prime markets are driven by greater levels of wealth, these households are likely better able to withstand this than those in the wider mainstream markets.

Looking further ahead, we expect 2024 to be a year of two halves as Bank base rate is forecast to gradually come down, and once the economy picks up and we see a more significant improvement in mortgage costs, demand from affluent buyers will pick up again.

In total over the five-year period to 2027, we expect values across outer prime London to rise by an average of 6.1%.

View our latest Q4 2022 updates here.

For more information, please contact your nearest London office or arrange a market appraisal with one of our local experts.