Subsequently, we expect a return to long term average rates of price growth as uncertainty subsides. Though we do not expect a dramatic bounce in values as has occurred historically, we expect the fundamentals behind the prime London markets will underpin demand over the longer term.
Further price adjustments expected in the prime London markets
Uncertainty surrounding the UK’s vote to leave the EU has compounded the extent to which successive increases in stamp duty have impacted the value of prime London’s housing market and will delay the return of price growth to the market.
We are therefore anticipating further adjustments in value for property in prime London over the remainder of 2016. Following this we expect two further years of uncertainty, whilst exit negotiations take place and the extent of the impact on London’s economy becomes more clear. This will limit any significant price growth over this period.
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FIGURE 1Price movements in the prime London markets to Q3 2016
Source: Savills Research
Prime Central London
In the highest value prime central London markets, average prices fell by -2.8% in the third quarter of 2016 and are now -10.6% below where they were in September 2014, prior to these stamp duty changes. For properties worth over £10m, where buyers have the highest levels of stamp duty to face, prices have adjusted even more considerably by -13.5% since their previous peak in 2014.
Transaction levels in these markets have also been impacted, particularly for property worth over £1m. The first nine months of this year saw 36% fewer £1m+ sales, when compared to the same period in 2014 and 23% less than the nine months to September 2015, according to LonRes market data.
On the flip side, since the referendum result in June, the value of the pound has been falling and does present an opportunity to overseas buyers who are particularly prevalent in the prime central London markets. Buyers are also being attracted to stand out properties and those which are considered to be best in class.
Outer Prime London
Beyond central London, markets have remained more robust. Prices in outer prime London have fallen by a more marginal -1.8% over the past three months, as these less expensive, more domestic housing markets have held up more strongly against increased transactional costs.
Within these markets, lower value properties have performed better, with those worth less than £750k just maintaining positive annual growth of 0.2% to the end of September and those worth between £750k and £1m falling only marginally over the year.
Although access to mortgages is being limited by increases in regulation, a further 0.25% cut in interest rates will benefit domestic buyers in these markets who could take advantage of securing a fixed rate mortgage.
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FIGURE 2Prime London 5-year capital values forecast
*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