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In the past eight years, the average value of prime central London (PCL) residential property has more than doubled, increasing by some 116%, 66% above the rate of RPI inflation. In a historical context this has been an unprecedented period of outperformance compared to the UK housing market, which has fallen -19.3% in real terms over the same timescale.

Historically, the price of PCL stock has risen substantially in the first half of a housing market cycle, before a period of catch up by the rest of the country. However, in the last two complete housing cycles, the overall gap has widened.

Since the start of our index in 1979 to the middle of 2005, the trend rate of real house price growth in central London was 4.4% per year, much more than the 2.3% seen across the UK as a whole. Since mid-2005, that rate of growth in PCL has increased to 6.8% and the gap has widened further.

Different drivers

This outperformance reflects the fact that PCL is driven by different factors compared to the mainstream UK market. UK mainstream residential has been largely dependent on the domestic economy, the supply of mortgage credit and the affordability constraints of UK households. In contrast, PCL demand is driven by global wealth, attracted to a political and economic safe haven, which is culturally diverse but also has a strong investment track record.

These attributes have been heightened over the past eight years, during which time global wealth, particularly from emerging economies, has grown significantly.

This has been supplemented by domestic wealth generated by London’s business, including the financial services sector – the banking system prior to the credit crunch and hedge funds, private offices and sovereign wealth funds thereafter.

Limited competition

The PCL residential market has few real competitors. Other prime markets in the UK have very different attributes, not least the nature of their housing stock. The closest comparison in terms of value and the ability to attract international wealth are the private estates in the Home Counties – St. George’s Hill and Wentworth Estate being the best examples.

There are few global cities with the same security of title and transparent and open real estate markets. New York is the nearest comparable, though for various reasons it does not have anything like the broad range of international demand. Among the capital cities of Europe, Paris has the next largest prime residential market, albeit that it is smaller in scale and has recently fallen foul of wealth taxes, but these pale in comparison to stamp duty and other measures introduced in Hong Kong and Singapore.

We expect demand for property to be underpinned by future growth in the number of domestic and international ultra high net worth individuals. Against the context of an inelastic supply of property, this indicates the continued long-term outperformance of the wider UK market.

What are the risks?

In the past 12 to 18 months, some of the major short-term risks to London’s performance have receded, most notably fear of a full-blown break up of the Eurozone.

Others remain, including the possibility of further taxation of high value property, coming on top of increases in the rate of stamp duty and the introduction of annual charges held through corporate or similar structures that have tempered price growth over the past year. The continued purchase of London property by overseas buyers has become a political issue, even though as many as 95% of them live and work in London or have business in the UK. It is one which is likely to result in uncertainty in the run up to the next general election, at a time when, conversely, the mainstream housing market will be receiving a boost through government stimuli.

The outcome of the election will determine whether high value property taxes are more likely to be introduced, which may be the difference between a bounce in values or a modest fall and slower return to previous levels of growth. Ultimately, this long-term level of growth in the residential property market will be underpinned by the wider demand/supply dynamic.

Taken from
Spotlight: Prime London Residential Market - Autumn 2013

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