The fog is starting to lift from what’s been a tough few years for housebuilders. Mortgage rates have been falling, even if, in recent weeks, markets have rowed back on the number of interest rate cuts pencilled in for next year. Average site reservation rates have steadily ticked up in the second half of 2024, mostly due to higher levels of forward sales to private buyers rather than big bulk deals to investors.
Prime markets have perhaps been more sheltered from some of these shorter-term shifts, which have predominantly hit mainstream housebuilders a little harder. However, they’re certainly not immune. Big land-buying decisions have been influenced by what has, for the most part, been a tough market. On top of that, there's been more recent political nervousness around the tightening of some tax rules for the well-off.
The relative weakness of the Prime London market has been the catalyst for many housebuilders based in the South of England to pivot away from the capital, and the market for flats in particular. This has been playing out for a while in land-buying markets but is now increasingly being reflected on the sales side of things. In 2024, new prime launches were more likely to be in Cobham than Chelsea, with the capital home to a dwindling share of new prime home sales.
While the Home Counties have long been happy hunting grounds for new prime home developments, mainstream housebuilders have increasingly piled in too. The sales secured in 2024 reflect the shift which has played out since 2016 in the development pipeline, where viability has been squeezed by rising land values and build costs, coupled with falling sale prices in some markets.
With more sales generated both in the Home Counties and increasingly beyond them across the South of England, the size and shape of prime developments looks very different to pre-Covid days. Smaller schemes of detached homes have increasingly replaced bigger blocks of flats in development pipelines. In 2024, around 30% of £1m+ new home sales were detached, a similar profile to the years after the 2007 crash. Although, absolute numbers have doubled to between 200-300 per year.
In these prime markets, house price growth has significantly outstripped rises in flat values. Since 2019, the average price of a detached home in the Home Counties has risen at twice the pace of the typical flat, although much of this faster growth occurred during the first three years of the pandemic. Since then, changes in prices have typically been very closely aligned.
It’s unlikely that 2025 will look radically different. However, we expect the strongest London market since 2016 on the back of even fairly modest falls in interest rates. While much higher mortgage rates have meant that, in the short term, property has been a fairly poor hedge against inflation, falling mortgage rates are likely to reverse that trend as they drop back down.
In places where house purchases are more discretionary and often weighed up against a menu of other assets, falling rates should start to underpin values in most of the capital’s prime neighbourhoods, which have been slipping for most of the last decade. As we head deeper into 2025, this growth will be set against a backdrop of falling returns elsewhere, which could encourage a few more investors into the market. This should begin to replace what’s become a negative narrative and generate some momentum for schemes where sales have been hard to come by.
