Despite all the doom and gloom surrounding a property price crash due to last September's mini-budget, the health of London's prime sales market remains relatively strong. But if buyers are adjusting their budgets to the 'new normal', is there still scope for a notable reduction in property values?
It must be said, the London property market has started the year better than expected. Following September’s mini-Budget, a spike in mortgage rates led to some dire warnings about the fate of the residential property market.
However, the third week of 2023 saw the fourth highest number of offers accepted in London during a single week in January in ten years, Knight Frank data shows.
And it is not just a case of buyers keen to act because they are sitting on reasonably-priced mortgages that pre-date September. Their numbers are dwindling fast.
New demand is also proving resilient. The number of new prospective buyers registering in the first three weeks of the year was 6% higher than in 2020, during the so-called ‘Boris Bounce’ that followed the December 2019 general election. In fact, the only time more new buyers have registered in the equivalent period over the last decade was in 2022.
Meanwhile, on the supply side, the number of new sales instructions in the third week of the year was the highest figure for a single week in January for a decade. A double-digit price fall does not exactly feel imminent.
Caveats remain, including the fact the property market shut down early for Christmas due to the mini-Budget. Could this be a short-lived bounce-back? Will more debt-reliant mainstream markets outside of the capital perform in a similar manner?
The resilience of prices and sales volumes will be put to the test in the spring when larger numbers of transactions take place and by which time virtually no five-year fixed-rate mortgages below 4% will remain in circulation.
So far, the evidence is that buyers and sellers have accepted the fact higher mortgage rates are here to stay, and that the Bank of England is now the primary cause, not Kwasi Kwarteng or Liz Truss.
The key question is: if buyer budgets are adjusting downwards, how far will house prices mirror the decline?
The answer is still unclear, but price growth in the prime London market was relatively subdued by its own standards during the pandemic, which is also driving activity.
Prices in prime central London (PCL) are 1% below their March 2020 level while in prime outer London (POL), they are 5% higher.
Compare that to the Nationwide UK index, which grew 20% between March 2020 and December 2022.
We forecast a decline of a few percentage points this year in PCL and POL as the reality of higher mortgage rates bites.
It would be surprising if prices fell by more than currently forecast. If they were flat or rose slightly, it would be less of a shock.
For now, average prices in PCL were flat in January, producing an annual increase of 1.2%. In POL, average prices were down by 0.1% from December, resulting in annual growth of 3.6% in the year to January.