Why a six year view? Because over the period of the past five to six years annual price movements in the prime markets of central London have varied by more than at any time over the past 30 years.

1. Pre-Boom

The first half of the Noughties saw mainstream house prices double, but Prime Central London had more mixed fortunes.

By June 2005 annual price growth in Prime Central London had slowed to just 0.9%, leaving values just 23% above their June 2000 level, as the global market of Prime Central London was rocked by a succession of events, including the bursting of the dot com bubble, 9/11 and the war in Iraq.

2. The Boom

Two years of rapid price growth followed for Prime Central London, on a scale not seen at any other point in more than 30 years that Savills has monitored the market.

In the 30 months to September 2007, residential values in Prime Central London rose by 64%.

Domestic demand was fuelled by strong economic growth and record earnings in the financial and business services sector. In 2006/07, City bonuses totalled some £11.5 billion and much of this money went straight into London property.

Overseas equity continued to pile into the prime London market, with established demand from Western Europe and the Middle East joined by new money from the fortunes made in Eastern Europe.

As a global city, London sat at the top of the list of world financial centres and provided a benign tax environment for non-doms. It was also accessible, both culturally and politically, to a wide pool of wealthy international buyers. A heady combination of significant global wealth generation and a limited pool of available property drove prices to new highs.

An ultra-prime market emerged for the right property in the right location. Developments such as The Knightsbridge set new standards for finish and facilities. Big became beautiful as a premium for scale developed, with larger units achieving a significant price per square foot premium across both existing and new stock.

3. The Crunch

The credit crunch brought this dizzying growth to an abrupt halt. As City earnings and employment security plummeted and the wealth of the international elite was eroded, so transaction levels fell dramatically and buyer confidence in the underlying worth of central London property waned.

Values fell 21% in just 18 months, recording a single quarter fall of 8.3% in the wake of the Lehman Brothers collapse.

4. Rapid Rebound

In March 2009 prospects looked bleak and few commentators anticipated the turnaround to come – as a staggering price growth of 25.5% occurred in just 12 months.

The exchange rate advantage that accompanied the weakness in the UK economy was a strong early catalyst for overseas investment, mirroring what had been seen after previous market downturns.

Prime Central London residential property came to be viewed as a distinctly safe haven for international wealth and an attractive alternative to gold. Even the introduction of a non-doms levy had little if any impact on sentiment.

Economic uncertainty in the eurozone drove wealth to the market through 2009 and 2010. Demand came from across Western Europe, but most notably from Italy as a tax amnesty at home triggered an influx of Italian money released from Swiss bank accounts, and from Greece, as it became evident their domestic economy was singled out as the most likely to default.

The rebuilding of global wealth on the back of strong commodity markets pumped more equity into central London. By 2010/11 both the number and collective wealth of US dollar billionaires had risen above its 2007/08 level according to Forbes.

In brief, demand from those looking to protect existing wealth was again joined by those looking to invest new money earned largely outside of the western economy.

A funnelling of demand allowed new luxury developments to take advantage of a shortage of top-end new-build stock. New developments, most notably One Hyde Park, have done much to rewrite the history of Prime Central London, and even in the wake of the credit crunch new records for pricing were being set.

5. Renewed Volatility

Volatility in price growth has been one of the key features of the Prime Central London market in the past six years and was expected to impact negatively on values early this year.

The second half of 2010 saw price growth slow on the tail of a second slip in UK mainstream prices, but significant price growth returned, unexpectedly, to London in the first two quarters of 2011.

The ‘safe haven effect’ has been further reinforced by political uncertainty in the Middle East, attracting buyers from a region long familiar with central London, while continued uncertainty in the eurozone has further enhanced London’s appeal relative to other European capitals.

Heightened concerns over the global economy and the erosion of wealth held in the world’s stock markets could test the ‘safe haven’ effect on values, and impact on underlying demand. It is unlikely that we have seen the end of price volatility even though the fundamentals look sound in the medium-term.

Taken from:
Spotlight: Prime Central London Residential, 2005 to 2011