"Looking to 2024, there is a window of opportunity for buyers and sellers as the economy settles and before a general election is called"
- Tom Bill - Knight Frank
The changing outlook for London’s prime property market was neatly encapsulated by events on Tuesday 12 December this year.
In the morning, it was announced that UK wage growth was marginally lower than expected, which suggested inflationary pressures were easing. It heightened speculation surrounding a rate cut in 2024, which only grew after weaker-than-expected GDP data the following day.
In the evening, there was a vote on the government’s Rwanda bill, exposing ideological divisions inside the ruling Conservative party. Talk of a confidence vote in the government and a stand-off with the House of Lords was reminiscent of the Brexit rebellion under Theresa May, which came to a head when the former PM resigned in May 2019.
The day’s events demonstrated that the primary risk for London’s prime property market is now political rather than economic.
So, how did 2023 unfold?
The fact higher rates curbed demand in 2023 was surprising in some ways. Half of sales inside the central zone 1 area are typically in cash and higher levels of affluence and housing equity would further cushion the impact of 14 consecutive bank rate increases.
But the economic gloom spread to every corner of the property market in the capital in 2023. Stubbornly-high inflation led to rate rises and buyers held off in anticipation that prices would fall. By early autumn, the unfolding war in the Middle East added to the mood of uncertainty.
The year didn’t start badly following Rishi Sunak’s election as Prime Minister and the prospect of economic stability after last September’s poorly-received mini-budget.
The number of offers made in the first quarter of this year in London was 11% higher than the five-year average. The number of viewings was up by 13% in the same period.
However, demand faded over the summer as high inflation took its toll. By the third quarter, the same two indicators were down by 13% and 9%, respectively.
As the economic news has improved in recent weeks demand has begun to strengthen again, and the number of offers made in November was 1% higher than the five-year average. Late autumn was certainly better than early autumn for the London property market, as we analysed here.
Overall, transaction volumes in London were 10% lower in the 12 months to November than the previous year, when numbers were boosted by a stamp duty holiday. That said, above £10 million, it has been the strongest year since 2015, as we explored here.
Meanwhile, average prices fell by 2.1% in the year to December in PCL, which was marginally less than our forecast of -3%. In POL, the decline was 1.6%, which also exceeded the 3% drop we forecast.
Price declines have not been as steep as forecast in most residential markets, with Nationwide and Halifax both reporting a small rise across the UK in recent months. Low transaction volumes may skew the numbers but there are other factors supporting prices.
A strong jobs market, the availability of longer mortgages, the fact more homes are owned outright than with a mortgage (35% vs 29% according to the latest English Housing Survey) and the absence of forced selling due to tighter mortgage stress-testing rules since the global financial crisis have all helped avoid steeper declines.
Looking to 2024, there is a window of opportunity for buyers and sellers as the economy settles and before a general election is called. If the Rwanda rebellion is quelled, the window will presumably stretch late into the year as the government allows the impact of this year’s autumn statement and next year’s spring Budget to take effect.
A general election brings uncertainty, but this time not only is there the prospect of a change in government but the possibility that Rishi Sunak will be forced to act sooner rather than later by rebellious factions in his own party.
In terms of the political risks, changes to non-dom rules and rates of stamp duty for overseas buyers could curb demand in London’s prime postcodes under a new administration.
But, as Paddy Dring, global head of prime sales at Knight Frank said: “To some extent, this is priced in. It has been the direction of travel globally for at least a decade. Governments want to control the flow of wealth around the world as it becomes increasingly mobile.”
In prime outer London, plans to add VAT to private school fees at a time when more favourable fixed-rate mortgage deals are ending may also take the temperature down a degree or two.
For all of these reasons, we believe prices are unlikely to move very much in either direction next year in PCL and POL.
