London Residential – Q3 2022
The third quarter of 2022 began well before succumbing to a steady shift in sentiment as rising interest rates and political uncertainty gripped the markets.
While annualised house price growth across the country slowed from the beginning of the period, it was still 11.5% in July and 10% in August, only 0.3% and 1% lower than 2021. Over 114,000 residential transactions were recorded in August (in line with the 2017-19 average) and the number of sales agreed in September were 14% above pre-covid levels. Despite a relatively solid quarter overall, September was the first month of no value growth since July 2021, dropping annual growth into single digits.
In addition to rising interest rates, geopolitical events continue to dampen the inflow of international capital, leaving London’s price growth rate below regional markets. According to Savills, annual price growth in London was 6.7% for September compared to a 9.5% national average. While London is expected to regain its dominance over nationwide performance, it could take some time for foreign buyers to be back in full swing.
The rental market fared much better, with Prime Central London (PCL) and Prime Outer London (POL) lettings prices increasing by 5.3% and 3.7% respectively in the three months to August. While new supply in August was a third below its five-year average in London, the number of prospective tenants was 75% higher, a mismatch which continued in September. The rental market is likely to see further growth to the end of the year as potential buyers opt to rent in the face of higher borrowing costs.
Putting the more recent ‘Trussonomics’ saga to one side, it is clear that there is more downwards pressure to come which could result in a reversal of house price growth in the short term. Rapidly rising interest rates coupled with inflation and market uncertainty have led some to suggest prices will fall more than originally anticipated.
Others point to forces in certain markets which offer price support. Lack of supply remains critical, with the number of buyers for quality stock far outstripping availability. This is more prominent in PCL and POL, markets which are also less reliant on borrowing than the mainstream and therefore less susceptible to interest rate rises. Value support is another factor, with PCL and POL values still being 18% and 8% below their 2014 peak, all in the context of a devalued sterling.
While this may not be enough to counter the effects of a 4% + base rate, it makes a good case for the medium-term outlook of the prime London markets.