"Rising supply is not universal and remains tight in areas like Notting Hill and Kensington, where demand in the sales market is resilient and the overall supply of property is low"
The story of low supply in the prime London lettings market appears to be coming to an end.
It will be welcome news for tenants, who face rents that are more than 25% higher than they were at the start of the pandemic.
The primary cause is the recent uncertainty in the sales market, which means more owners are letting out their properties after failing to achieve their asking price.
Mortgage rates have risen sharply following two consecutive months of high inflation readings. The Bank of England raised the bank rate by 50 basis points last week to 5%, its highest level since early 2008. It has curbed demand and prompted concerns over how far prices could fall.
Gary Hall, head of lettings at Knight Frank, comments: “The preference for many owners is still to sell. But more are open to the rental option given the recent wobbles in the sales market. Tenant demand is strong and yields are very healthy, which adds to the appeal.”
The number of new prospective tenants registering was 31% above the five-year average in May, underlining the strength of demand from students and businesses. Meanwhile, gross yields reached 3.99% in prime central London in June, the highest figure since 2009.
On the supply side, the combined number of lettings listings in PCL and POL was the second highest level since September 2021, Rightmove data shows.
However, rising supply is not universal and remains tight in areas like Notting Hill and Kensington, where demand in the sales market is resilient and the overall supply of property is low.
As a result of the imbalance between supply and demand becoming less pronounced, annual rental value growth in PCL fell to 14.4% in June, the lowest level since October 2021. In prime outer London, a figure of 12% was the lowest over the same time period.
Stock levels began to rise early this year due to the negative impact of the mini-Budget on the sales market. However, sales activity rebounded more strongly than anticipated and lettings supply stayed low.
Whether supply continues to build this time depends on how protracted the mortgage market instability remains.
The recent volatility is likely to accelerate a price correction in the capital. Sensitivity around asking prices is higher than it was just a month ago and nervousness among lenders is rising.
That said, there will be a cushioning effect from strong wage growth, record levels of housing equity, amassed lockdown savings, the availability of longer mortgage terms, forbearance from lenders and the popularity of fixed deals in recent years.
The opposing forces of natural market resilience and rising economic uncertainty mean that prices are likely to keep slowly deflating for the rest of this year.
Prime London sales market continues to weather the mortgage storm
The air continued to slowly come out of the prime London property market in June - a process that began last summer as inflation approached double digits and it became clear that interest rates were heading back towards their long-term average of closer to 5% than 1%.
There was no palpable sense of distress, but the economic mood-music became more sombre. Buyers hesitated and annual price growth gradually descended to zero over the following 12 months
September’s mini-Budget was an unwelcome but brief jolt to the system but a nasty inflation reading last month sent interest rate expectations higher again. The Bank of England has faced criticism for doing too little too late, especially after a second consecutive high number last week.
Mortgage costs have spiked and speculation around falling prices has mounted but has there been any impact on the prime London market over the last month?
Yes, but not a particularly dramatic one. The economic mood has darkened but the market is far from grinding to a halt. The number of new prospective buyers in London over the most recent four-week period was 24% above the five-year average.
The resilience is perhaps no surprise given that around half of sales inside Zone 1 are typically in cash. The market will also be supported by greater levels of affluence, the relatively weak pound (depending on your timing) and the fact overseas travel is returning to pre-Covid levels.
Higher price brackets have certainly proven more robust as activity tends to be less reliant on mortgage debt, as the chart shows. And overall, activity in London is stronger than outside the capital, where there is a less discernible post-pandemic economic bounce.
However, recent mortgage market volatility is likely to accelerate a price correction in the capital. Sensitivity around asking prices is higher than it was just a month ago and nervousness among lenders is rising. Our latest forecasts are here.
That said, there will be a cushioning effect from strong wage growth, record levels of housing equity, amassed lockdown savings, the availability of longer mortgage terms, forbearance from lenders and the popularity of fixed deals in recent years.
The opposing forces of natural market resilience and rising economic uncertainty mean that prices are likely to keep deflating for the rest of this year, but only slowly.
