Some confidence has returned to the prime London markets leading to the start of a realignment between buyer and seller expectations. Price falls are expected to continue easing as mortgage rates drop more significantly.
Frances McDonald, Director, Residential Research
The prime housing markets of London experienced an easing in the level of price falls during the final quarter of 2023, as more confidence returns to the market. Slowing inflation and lower mortgage rates have contributed to this.
The source of buyers’ funding has become a key determinant in the performance of different markets. Prime central London recorded the smallest falls in values during 2023, at -0.8%, following a marginal fall of -0.2% during Q4.
Across the more mortgaged-dependent outer prime London markets, prices fell by -0.3% in the final quarter, an improvement on the -0.8% recorded in Q3 and leaves them down by -1.2% on an annual basis.
These figures point to a market that is past ‘peak pain’ as price falls continue to ease. But despite this increased optimism, with the majority of Savills London agents (79%) expecting to see stock increase in the next three months, realistic pricing among sellers will remain crucial in the coming months.
During 2023 there has been a growing divergence in performance across different price points. Generally, lower value properties which are more dependent on demand from those using mortgage debt, such as first time buyers and investors, have fallen most significantly.
Across outer prime London, this means that property worth less than £1 million has fallen by between -1.8% and -2.3% while those worth more than this have held steady, falling by just -0.5% in 2023.
Higher value homes across North and East London, in particular Hackney, Islington, Shoreditch and Victoria Park, recorded annual price growth as a result of a continued imbalance between the supply and demand of larger family homes in these areas.
The more discretionary nature of the very top end of the market in central London means the value of property worth more than £10 million is down by -1.3% on average but this has supported greater levels of activity at this price point.
There has been an increasing alignment between buyer and seller expectations on price during the final three months of 2023.
The majority of agents (73%) reported that sellers are expecting to get less for their home than they would have done three months ago and the same proportion also agree that buyers are expecting to pay less for a home. Interestingly, some agents (12%) have even seen an increase in buyer budgets during the final quarter of the year, as they respond to improved sentiment.
This alignment should continue to support an improvement in activity levels, with sellers most realistic on price likely to achieve the best end result.
Data from TwentyCi highlights that agreed sales net of fall throughs in London recovered to within 3% of their pre-pandemic average during the final quarter of the year, having been -11% below this level for the first nine months of 2023. Activity by this measure also increased by more than a third (35%) when compared to the final quarter of 2022.
This activity has continued to be driven by a greater number of price reductions. Over the year as a whole, there were 16% more price changes in London, when compared to the average for 2017-19 and this increased to 24% during the final quarter of the year.
Although some confidence has returned, a more significant improvement in market conditions is likely to only come once a Bank of England base rate cut is on the horizon and there is a more substantial decline in mortgage rates.
We have pencilled this in for the second half of this year, although some economic forecasters have brought forward their expectations, as a result of recent inflation data which saw CPI fall to 3.9% in November.
Across outer prime London, price falls are expected to total just -2.0% this year and the trends seen in 2023 likely to continue, with debt-dependence very much dictating the market performance of different property types and locations.
Despite some uncertainty surrounding the planned general election, prime central London is the only residential market not forecast to experience a dip in values in 2024. With prices still well below historic peaks, this market represents a ‘buy’. Price growth is expected to return in 2025 once the global economy picks up more significantly and any domestic political instability subsides.
Over the medium term, a recovery looks well overdue but at around 19% in the five years to 2028, we expect it to be less aggressive than in previous cycles given a higher tax environment and greater scrutiny on sources of buyer wealth.
Prime house price forecasts
< View our latest Q4 2023 updates here.
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