House prices in Prime Central London have, for the most part, been treading water ever since 2016. Values of £1,000psf+ homes stand an average of 4% below where they were in 2016, with flat prices in particular suffering more. By comparison, sub £1,000psf London prices which predominantly reflect outer London locations have risen 14% over the same period, with most of that growth coming in the years after 2016.
This is all fairly typical tail end of the house price cycle behaviour, albeit with slightly less growth than last time around. It was a similar story during the run up to the 2007 downturn when price growth across Prime Central London, and indeed the rest of the capital, ground to a halt while the rest of the country caught up.
Over the last 18 months, the shift towards higher interest rates and global economic uncertainty has steadily squeezed the number of homes coming on the market. While stock levels have crept up on the back of the lengthening time it takes to sell each home, the number of people choosing to put their home onto the market has been falling. This is particularly true in prime markets given that the majority of sellers are discretionary and are willing and able to wait out a weaker market. The number of new £1m+ instructions in London is down 65% on the same time last year which means that new instruction numbers so far this year are running at around 65% of 2018's levels.
The lack of price growth over the last few years means that more recent buyers face a higher chance of crystalising a loss in Prime Central London than anywhere else in the country. As a result, a lower share of 2023 sellers had bought within the last 7 years in Kensington & Chelsea, City and Westminster than elsewhere in the capital or indeed the country. For the majority of overseas owners who bought in prior to 2016, this calculation has for the most part been compounded by currency shifts, resulting in a progressively weaker pound. Instead, moves are dominated by those who bought pre-2016 and are more likely to sell at a profit. And some of those gains remain substantial given that the average price of a home rose 78% in PCL between 2008 and 2016.
In these three prime boroughs, between 44% and 67% of 2023 sellers who had bought since 2016 achieved more than they paid, well below the London average of 79%. This has weighed down on the numbers of household choosing to sell, and ultimately the number of transactions taking place. And until values pick up meaningfully, there’s going to be an increasingly large cohort of fairly recent purchasers sitting on their hands. Of course the majority who bought much further back is still sitting pretty, but their numbers are dwindling.
So what’s next for Prime Central London? Unlike much of London, higher interest rates haven’t ushered in a significant shift of purchaser profile. While would-be movers here have mostly sat tight, elsewhere first-time buyers looking to escape the rental market have made up some of the shortfall. This hasn’t really happened in prime markets, meaning that there’s been a bigger drop in the number of homes changing hands than elsewhere. The interest rate pressure on investors means they’ve not picked up any of the slack either. Where there are investors in the market, either domestic or overseas, they're typically looking to buy well outside the Capital in search of higher rental yields.
That said, the appeal of London still holds true. Appetite from international buyers looking to purchase homes for their children while they study in the UK remains. And from a domestic demand perspective, the return to the office combined with the fact that the gap between prices in Inner and Outer London has narrowed has drawn some buyers further into the capital. From an investor perspective, record breaking rental growth in Inner London since the pandemic is boosting rental returns which might be enough to entice a few landlords back into the market in the hope that their returns will be enhanced further by stronger price growth in the next few years too. It's also acting as an incentive to keep existing landlords in the market, particularly those who haven't benefitted from much capital growth.
The swift pace of rental growth coupled with fairly flat pricing has opened up the opportunity to achieve yields which would have been well out of reach even a couple of years ago. The average yield on a new investor purchase in Kensington and Chelsea this year stands at 5.3%, up from a pre-pandemic average of 3.9%, and on par with the yields being achieved in places like Southwark and Lewisham pre-2020. It's a similar story in the City of London where the returns for the lightly leveraged investor are comfortably surpassing savings rates.
Realistically however, it’s hard to see much price growth here until 2025, after the election and into the start of a new house price cycle which will invariably be led by London’s priciest pockets. At this point we expect growth in Prime Central London to be running faster than pretty much anywhere else. And by 2026 prices will finally rise back above their 2016 peak, a whole decade later. This is likely to unlock transactions from buyers who have stayed put because they bought post-2016 with their home not currently worth what they paid for it.
But it’s likely that this price growth, by historic standards at least, will be fairly modest. Financial markets expect interest rates to remain higher than we’ve become accustomed to. This will probably bear down on the rate of price growth relative to recent times, particularly in Prime Central London where purchases tend to be more discretionary and weighed up against returns elsewhere. However these higher rates are likely to prove inflationary for rental growth which we think is likely to continue running well above pre-pandemic norms.
So while we do expect house prices to rise, particularly as interest rates drop back from where they are today, we’re expecting trough to peak growth over the next house price cycle to come in lower than it did between either 1992 and 2007 or 2008 and 2024. While inflation will eventually drop back in the face of higher interest rates globally, the Bank of England, scarred from its less than transitory nature, will prove reluctant to cut rates quickly or sharply. Ultimately, higher borrowing costs will serve to keep a cap on future house price growth - in both prime central London and beyond.
Housing Market Forecasts 2023
Read our full autumn 2023 forecast report PDF.
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