Cash buyers have supported activity across prime London, but the market remains price-sensitive as buyers’ budgets have come under pressure. As such, sellers who are most prepared to be realistic on price will likely garner the best end result
Frances McDonald, Director, Residential Research
The prime housing markets of London have remained comparatively robust so far in 2023, but they haven’t been immune to months of rising interest rates and wider economic and political uncertainty.
Prices across prime central London fell by a marginal -0.5% during the third quarter and by -1.2% in the past year. For the more needs-based outer prime London markets, values fell by a slightly greater -0.9% during Q3 and by -2.5% annually. At this point last year, annual growth totalled 2.2% and 4.1%, respectively.
Overall, the prospect of house price falls and wider market uncertainty is now having the biggest impact on buyer sentiment across London’s prime property market, according to Savills London agents, having overtaken increasing interest rates since last quarter.
While there has been a growing acceptance from sellers that prices have fallen from pandemic highs, buyer expectations on prices are still markedly lower than sellers, with a majority of agents (53%) reporting that buyers are expecting to pay -5 to -10% less for a home, while they believe half of sellers only expect to get 0 to -5% less for their home.
For all but the very best properties, buyers and sellers are as much as 5% apart on price. Closing this gap will be crucial in maintaining activity levels for the remainder of the year, with sellers most prepared to be realistic on price likely to garner the best end result.
Similarly, data from TwentyCi highlights that activity has continued to be facilitated by a greater number of price reductions. During the first nine months of the year, there were 24% more price changes in the market above £1 million in London, when compared to the same period in 2022. This has helped to bridge the gap between how far buyers have been able to stretch themselves and the higher aspirations of sellers.
Over the past three months, there has also been a continued divergence in performance between different prime London property types – with houses holding up significantly better than flats across every region.
Houses in North and East London (primarily Victoria Park, Islington and Hackney) were the only type across prime London to record positive growth. Values increased by 0.7% in the year to September as a result of constrained stock and increased demand. But prices for flats, which are more dependent on demand from those with a greater reliance on mortgage debt, have fallen across every prime London location.
Indeed, the vast majority (68%) of agents ranked 4–5 bed houses as first or second, in terms of highest demand. Meanwhile, almost half (47%) ranked 1–2 bed flats as being in the least demand.
The impact on both prices and activity levels has largely been dictated by the relative balance between debt and equity as a source of funding.
Mortgage borrowing is largely discretionary in the prime central London markets and so we saw an uptick in borrowing when interest rates were at historic lows during the pandemic. Now these markets are benefiting from affluent buyers’ ability to transact with cash or low loan-to-value ratios as rates have risen.
But not all prime markets are underpinned to the same extent by reserves of cash and equity. The prime family house markets of South West and West London, for example, are typically more highly leveraged and so they have become increasingly price sensitive. Values have fallen by an average of between -2.0% and -2.5% over the past year in these regions.
Looking ahead, although cash buyers have supported activity across prime London, a more significant shift in market conditions is reliant on buyers seeing their spending power increase, as opposed to decrease.
The fact that the Bank of England held Bank base rate at 5.25% in September and the prospect of a continued steady decline in inflation over the next 18 months or so, has limited the likelihood of further rate rises.
This has caused some stability to return to the lending markets and fixed-rate mortgage costs have eased back, particularly for longer-term products. But a more meaningful change in debt costs, and therefore a gradual recovery in prices, is dependent on Bank base rate being cut. That seems unlikely before the second half of next year.
Even in prime central London, price sensitivity and buyer caution is also likely to continue into 2024, particularly as we approach the next general election. But we still expect central London to outperform all other UK residential markets in the medium term, not least because of its standing in an international context and the fact that global wealth generation is expected to continue rising.
< View our latest Q3 2023 updates here.
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