After a weak final quarter in 2022, due to the mortgage market chaos unleashed by the mini-Budget, price declines in prime London markets appear to be bottoming out.
Average prices were flat on a quarterly basis in prime central London in February, which compares to the decline of 0.6% recorded in the three months to December.
Meanwhile, prices in prime outer London recorded their first monthly rise (0.2%) in February since September.
The average rate for a five-year fixed mortgage is headed below 4% after spiking above 6% in the aftermath of the mini-Budget. Financial markets took fright at the inflationary potential of the previous government’s low-tax economic plans, but nerves are settling under new prime minister Rishi Sunak.
That said, double-digit inflation has led to successive bank rate hikes and pushed mortgage costs higher. This time last year a five-year fix was priced below 2%.
Demand remains strong against the relatively stable economic backdrop and the number of new prospective buyers registering the first seven weeks of the year in London was 28% higher than the five-year average. Meanwhile, the number of new sales instructions was 36% higher.
It mirrors what is happening across the UK, where the property market has made a better start to the year than expected.
That said, activity is stronger in higher price brackets where there is less reliance on mortgage debt. Around half of the sales in PCL are in cash, as we explored recently.
The number of exchanges above £2 million was 66% above the five-year average in January. Below £2 million, the increase was 12%. Meanwhile, the number of new prospective buyers above £2 million was 52% higher, while the rise was 20% in the sub-£2 million bracket.
Rory Penn, head of London sales at Knight Frank, said: “Nerves have settled and the aftershock of the mini-Budget is dissipating. However, the true test of strength across all price points will be the spring market.”
Spring is when sales volumes traditionally increase and the price expectations of sellers will be properly put to the test.
On an annual basis, average prices were essentially flat in February in PCL, rising by just 0.9%. While there was a decrease of 0.5% below £1 million, there was a rise of 2.1% between £5 million and £10 million, reflecting the relatively stronger performance of the market in higher price brackets.
Meanwhile, there was an increase of 3% in POL. An increase of 1.8% below £1 million compared to a rise of 4.4% above £5 million.
We expect prices in PCL to outperform most UK markets over the next few years, according to our latest forecast. The prediction is underpinned by the higher percentage of cash buyers, currency discount for overseas buyers and the fact prices remain 15% below their last peak in August 2015.
Lettings - Supply may stay lower for longer in prime London lettings market
Last month we explored how supply was increasing in the prime London lettings market. The trend may prove to be short-lived.
The reason is a stronger-than-expected sales market, which means more owners are attempting to sell their property rather than becoming landlords.
Compared to the first two weeks of 2023, the number of lettings instructions in London was 21% lower in the second fortnight of the year and 12% down in the following two-week period.
As the shock of the mini-Budget fades and mortgage rates begin to stabilise, it has supported demand in the sales market, in prime London and across the UK. The strong start to the year compares to a subdued final quarter of 2022 when financial markets took fright at the low-tax plans of the previous government and mortgage costs rose sharply.
Gary Hall, head of lettings at Knight Frank, said: “The strength of the sales market since Christmas has taken most people by surprise. It means the flow of stock we had started to see come across to the lettings market in some areas has slowed down. This will keep supply tight and maintain upward pressure on rents in the short-term.”
Rental values are still 26% higher in prime central London than before the pandemic while the equivalent figure in prime outer London is 23%.
Rents have been pushed higher by stock shortages over the last 18 months, while the re-opening of offices and universities has boosted demand. Supply has struggled to keep pace as owners took advantage of a resurgent sales market, which was turbo-charged by a stamp duty holiday. Prospective landlords have also been put off by tax hikes in recent years and the prospect of further legislative changes, intensifying upwards pressure on rents.
It means prospective tenants could face the frustration of supply that stays lower for longer.
David Mumby, head of prime central London lettings at Knight Frank, comments: “Based on the evidence of the last few weeks, it looks increasingly unlikely that the lettings market will return to any sense of normality this year. Despite an initial flurry at the start of January, stock levels again feel low across all price points and prospective tenants will need to remain decisive when looking for a rental property.”
Average rental values grew by 18% in the year to February in PCL while the equivalent rise in POL was 15.6%.