■ We expect house price growth to be muted in the short term as the market adjusts to a new fiscal and regulatory backdrop before the fundamentals of demand for prime property restore growth.
Prime London homes continue to feel the stamp duty effect.
Summary
■ House price growth across prime London was muted in the third quarter with average values remaining flat year-on-year.
■ The markets subject to lower stamp duty charges saw stronger growth than properties valued over £2 million.
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TABLE 1Price movements in the prime London market to Q3 2015
Source: Savills Research
Prime London house prices grew, but only marginally, over the summer months as the market continues its adjustment to the higher stamp duty charges introduced in December 2014, taking average values back to levels seen a year ago.
Average prices across all prime London’s housing markets rose by 0.7% in the three months to the end of September, while the prime central London average fell slightly, by -0.4%. The strongest performer was the prime West market of Ealing, Chiswick and Hammersmith which rose by 2.1% in the third quarter, leaving average values 4.8% higher than a year ago.
However, the averages for the five prime areas masks variations in price growth, which now relate as much to the different value bands as to location. Over the past year, price changes have broadly reflected stamp duty increases at different price points and therefore growth has been concentrated in the sub £2m market.
Homes in the £500k – £1m range, which are subject to lower stamp duty charges, have risen by 3.0% year-on-year, and in the £1m – £2m range by a marginal 0.9%. By contrast, those over £2m have adjusted by an average of -2.6%.
The £5m+ market
At the top end of the prime London market, properties worth £5m+ saw average values fall -4.7% over the past year. A much more significant fall than in the £2m – £5m price bracket. Although remaining relatively robust, transaction levels were -19% lower over the first 9 months of 2015 compared to the same period a year ago. The most expensive properties valued £20m+ saw a greater decrease, with levels -26% lower due to these properties being most affected by the increased transaction costs introduced at the end of last year.
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TABLE 2The stamp duty effect by price band
Source: Savills Research
Outlook
A decisive election was expected to boost confidence in the prime London market, but it remains relatively price sensitive, particularly in higher value submarkets. This reflects the increased transaction costs resulting from successive reforms of stamp duty, and, in the more domestic markets, the ongoing impact of the Mortgage Market Review. It will take time for the market to adjust to these additional constraints.
While the new rates of stamp duty undoubtedly look onerous, there seems little chance of a policy reversal in the immediate future unless the change results in a net loss to the exchequer. Though transaction levels at the top end of the market have certainly slipped it does not appear that stamp duty revenues from this part of the market have fallen to any significant degree so far.
However, looking forward, the fundamentals of wealth generation support medium term house price growth. As such, we have pushed out our five-year forecasts by a year to 18 months, with the exception that price growth to the end of 2020 will average a total of 21.5% in the prime central London market.
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TABLE 3Five-year forecast values
NB: These forecasts apply to average prices in the second hand market. New build values may not move at the same rate
Source: Savills Research
