"The resilience of prices in prime London property markets will be put to the test next spring"
The number of new prospective tenants in prime London lettings was 26.7% above the five-year average in November.
Consequently, average rental values in prime central London (PCL) ended the year 17.8% higher, or 23.2% above their pre-pandemic average.
In prime outer London, the annual rise in December was 15.8%, meaning rents were 21.1% above their level in March 2020. It means prospective tenants have been operating in a highly competitive market.
As the year ends, the supply of lettings properties in prime London postcodes is less than half the five-year average. The statistic does not relate to the final month of this year, but December 2021. There has been a marked imbalance between supply and demand for 18 months, and the narrative of frustrated tenants and fast-rising rents has become familiar in London and other cities around the world including New York.
The supply picture was not dissimilar at the end of this year. On the demand side of the equation, the number of new prospective tenants was 26.7% above the five-year average in November. Consequently, average rental values in prime central London (PCL) ended the year 17.8% higher, or 23.2% above their pre-pandemic average. In prime outer London, the annual rise in December was 15.8%, meaning rents were 21.1% above their level in March 2020. It means prospective tenants have been operating in a highly competitive market.
There are some signs that supply is improving in higher-value markets as owners tend to be more discretionary with their options, a trend we explored here. It could even be a sign of things to come for the rest of the market in 2023.
By the time the spring selling season gets underway next year, mortgage rates will be at least 2 percentage points higher than they were this spring as rates normalise in response to double-digit inflation. It will force a great recalculation on the part of buyers and sellers around what they can afford and what they are prepared to sell for. We expect it will drive prices 10% lower over the next two years, reversing half the growth that took place during the pandemic.
Some owners will accept lower prices while others will decide to let out their property instead, even in the short to medium term. The recent history of strong double-digit rental value growth will be an added attraction for these so-called ‘accidental landlords’. Three years after the pandemic first struck, the UK property market may finally begin the process of self-correction next spring, potentially providing some relief to tenants.
Rarely has the current state of the property market been such a poor guide for what happens next. Yes, prices and transaction volumes will come under continued pressure, but the last quarter of this year is hardly a useful yardstick for 2023.
The reason is straightforward. Kwasi Kwarteng’s mini-Budget took place more than three months ago, but mortgage rates have not resumed the path they were on at the start of September.
Financial markets took fright at the previous government’s low-tax economic plan and borrowing costs spiked in anticipation of higher inflation. It has created a disorderly picture at the end of 2022.
Some buyers have mortgage offers that pre-date the mini-Budget and are motivated to move quickly. Elsewhere, budgets have been cut as monthly repayments rise. More discretionary buyers are stepping back and waiting for mortgage rates to come down while others still need to move now. Until mortgage rates settle, the great recalculation that will have to happen among buyers and sellers cannot take place.
In the meantime, the property market in prime London postcodes is proving resilient. The fact cash buyers are more prevalent in higher-value markets will protect prices as borrowing costs rise, as we explored here and here.
The number of exchanges in November in prime London markets was 16.2% higher than the same month in 2021 and 15% higher than the five-year average, Knight Frank data shows.
However, buyers are understandably wary, as the chart shows. The number of offers made in November was 16% below the five-year average, reflecting the uncertainty that has arisen from the recent spike in borrowing costs.
However, as the falling five-year swap rate shows, mortgage rates should continue to decline, which means the fall in offers made may have bottomed out. Meanwhile, the number of offers accepted was 22.2% above the five-year average in November, which suggests the nervousness among prospective buyers does not mean sales volumes are about to fall meaningfully.
The resilience of prices in prime London property markets will be put to the test next spring, when activity levels traditionally pick up across the UK, as we analysed here. Until then, prices should remain in somewhat of a holding pattern, although the monthly declines that followed the mini-Budget have now ended.
Average prices were flat in both prime central London and prime outer London in December, taking annual growth to 1.5% and 4.4%, respectively. We forecast both of those figures will come under greater downwards pressure next year.
