Where things stand 

Given performance since 2014 it is easy to forget that the fundamentals of what attracts buyers to central London remain strong; business, connectivity, tourism and education. 

Values remain -19% below their peak in 2014 and are down by -38% on an inflation adjusted basis since then. 

So on the face of it, the central London market is long overdue a recovery, even if the experience of the past nine years tells us that you need a degree of economic, political and fiscal stability for that to gain traction.

This said, during the most recent housing market downturn prime central London has held up remarkably well, both in terms of pricing and transactions. Values have fallen by just -1.2% during the past year with only -0.6% of that taking place in the first nine months of the year, outperforming all other UK residential markets. 

Transactions for London homes worth more than £5 million have also remained strong with 390 such sales recorded in Q1-Q3 2023. While this marks a -15% fall compared to the same period in 2022, it is 7% higher than the first nine months of 2021 and two thirds (67%) higher than the pre-pandemic average. 

But some degree of caution and a lack of urgency remains. Sterling’s appreciation, particularly against the US dollar, macroeconomic pressures on global wealth and requirements for transparency around beneficial ownership have contributed to this. 

Domestic economics

Central London buyers typically aren’t reliant on mortgage debt and so higher interest rates are likely to have less of a direct impact on this market. Indeed, only 23% of Savills central London buyers used debt to fund their purchase in the first eight months of the year. This is lower than the 34% recorded during the pandemic, when rates were at historic lows. And so this part of the market is, to some extent, insulated against the pressures impacting the wider housing market. 

Nonetheless, the fact that the Bank of England has maintained Bank base rate at 5.25% and is expected to reduce rates over our forecast period should help support a gradual return to price growth once global economic prospects pick up.

Global economics

World GDP growth is forecast to continue slowing in 2024 with the US and Europe likely to face similar challenges as the UK.

However the recent disruption in the Middle East creates an added layer of geopolitical uncertainty. It will take some time to see the extent to which London’s safe-haven effect and the potential for higher oil prices offsets this.

What we can say is that the Middle East has been a strong source of buyers in central London, so we will be closely watching the impact on demand from this region. 

Overall, world GDP growth is expected to increase in the longer term but is likely to continue to be weighted towards emerging and developing economies, We expect this to form the scale and shape of global wealth generation which is critical to demand for global prime real estate.

Wealth generation

Following a slight decline in 2022, the number of ultra-high-net-worth individuals (UHNWIs), a key buyer group for central London homes, is expected to reach 372,000 by 2027, rising by 129,000, or 53%, in five years. 

And despite some concerns surrounding the UK capital’s standing in a global context post-Brexit, London remains an international hub for business and has a rapidly growing tech sector in particular. The UK capital attracted by far the most venture capital in Europe last year (US$12.2 billion) and importantly this has helped to cement its position as Europe’s premier tech city. 

This suggests that central London’s potential buyer base is set to continue to expand and become more diverse, supporting our forecast for house price growth over the next five years. 

Political uncertainties

A general election (which must be held in the UK no later than 24th January 2025) often leads to uncertainty in the housing market. And given central London’s highly discretionary nature, this suggests some buyers and sellers will adopt a “wait and see approach” throughout much of next year and into 2025. 

Current polls suggest the odds are on a change in Government. In this regard, the Labour party has come forward with a number of proposals that could impact the central London housing markets. 

First, the abolishment of non-dom tax status. Data from HMRC suggests there were 55,000 resident non-doms who paid tax in the UK in 2021/22, two-thirds of whom were London based. Previous changes to non-dom rules suggest there isn’t a significant risk of an exodus from the city. But it could eat into some of London’s appeal as a place for the global wealthy to settle. 

Labour have also stated their plans to increase the additional stamp duty surcharge for overseas buyers, though there has been little in terms of detail as of yet. Given the scale of existing stamp duty receipts from this part of the market, this will be a delicate balance between raising rates and protecting current receipts.

This said, it appears we are less likely to see further wealth taxes, the previous risk of which have added to caution in the market.

Conclusion

There are clear headwinds facing the prime central London market in the short term. As a result, we expect price growth to be muted throughout 2024 and remain flat throughout the year as a whole.   

Thereafter any recovery will have to occur in a higher tax environment and one where there is greater scrutiny on sources of wealth than in the past.

We continue to expect prime central London to outperform most other UK residential markets over the next five years. But our forecast for growth of 18.7% in the five years to 2028 would still only leave values at the same point they were at in early 2015.