Greater London house price growth of 6.9% predicted in 2013

Key Points:

·      Prices to rise in PCL by 8.4% this year up from previous forecast of 5%

·      Return of bidding wars in some areas of London

·      Rental growth static at 3% in 2013

·      Prospect of rising base rates a concern

Greater London house prices are set to grow by 6.9% this year, annualised at a rate of 3.2% over the next five years as the Government’s Help-to-Buy scheme is extended to all homebuyers from next year bringing more financed buyers to the market without an equivalent increase stock, reports Cluttons in its Residential Property Forecasts – Q3 2013.

The consequence of this pace of uplift in house prices will push ownership in and around London out of reach of yet more households. Even in London where earnings tend to grow slightly ahead of the national average, it is unlikely that average earnings will keep pace with this rate of house price growth over the next two years as the economy struggles back to strength.

The position is more acute in prime Central London where Cluttons has revised its forecast of 5% house price growth to 8.4% this year with an annualised average of around 4% to the end of 2018. Credit ratings agency Fitch has also warned that Help to Buy could artificially push up house prices without increasing the number of homes built, which corroborates Cluttons' expectations of affordability re-emerging as the central issue for buyers given that mortgage lending has improved.

The upturn in prices has caused a return of bidding wars in the capital which has tempered the capacity of first time buyers to enter the market. Greater acceptance of buy to let mortgages for those wishing to rent and buy or rent further from London has further reduced the availability of stock traditionally available to first time buyers.

Sue Foxley, head of research at Cluttons said: “Improved consumer confidence, an easing in mortgage credit and the raft of government policy intervention measures to bolster new buyer demand will drive further capital growth and this has led us to revise our forecast to 8.4% price growth this year.

“The prospect of rising base rates over the medium term proffers a further concern with the ratio of residential values to gross earnings already over seven in London. With few signs of a dramatic increase in supply that would have the potential to change the balance of this equation, the rental market will inevitably move up the agenda for London’s households and policy makers.”

Cluttons also reports that rental demand in Central London remains strong but individual and corporate rental budgets are subdued which is translating into RPI, nil or slightly negative rental growth. Cluttons forecasts London rents to grow by 3% this year, with an annualised average of 4% per annum to the end of 2018 which is in line with long term average earnings growth for London.

Prime central London property bubble ‘bigger and still vulnerable’

As London’s prime residential property prices rise even further relative to the rest of the UK, a new report commissioned by Development Securities PLC and carried out by Fathom Consulting, today concludes that while economic drivers can partially explain this growing premium, a proportion remains difficult to explain – the core characteristics of an asset price ‘bubble’.

The report, Prime Central London: One year on, and even higher, uses a unique statistical model to identify the key economic drivers behind Prime Central London’s (PCL) price movements. These are materially different from those affecting house prices in the rest of the UK, and include: global equity prices; the relative value of sterling; and safe-haven flows. Over long periods of time, the model has accounted for 85% of the movement in PCL prices. The report finds that the price of a typical property in PCL is now more than 6.5 times the national average, and has risen by almost 20% since the time of our first report published last year. Moreover, PCL prices are more than 10% higher than Fathom’s economic model suggests they ought to be. PCL valuations now seem less sustainable and more vulnerable to correction.

The report identifies that the biggest threat to PCL property prices would be the failure of the US Federal Reserve to engineer a smooth exit from its Quantitative Easing programme. By tapering too soon and implementing a simultaneous tightening of both fiscal and monetary policy, the report identifies a risk that the US Federal Reserve sparks a fall in the price of assets, including PCL property. The report warns that a disorderly unwinding of the US QE programme could knock around 40% off global equity prices and about half of this amount off PCL property prices.

This is the second report in a series on Prime Central London property. The previous report, Prime Central London: In a Class of its own? was published in May 2012 and showed that global investors seeking a safe-haven, immune from the threat of the euro demise, had significantly boosted PCL prices. 

Michael Marx, Chief Executive of Development Securities PLC, said: "We remain convinced of the underlying attraction of Prime Central London property. As a place in which to live, Prime Central London is unique. But of course that does not make it immune from the laws of supply and demand. With the average Prime Central London property now a little under £1.5 million, valuations have never been more stretched. We are less confident now than we were back in May 2012 that Prime Central London prices are sustainable.”

Danny Gabay, Director of Fathom Consulting, said: “With the prospect of a euro break-up moved to the back burner, ‘tapering’ by the US Federal Reserve has come to the fore as the biggest threat to PCL prices. The gradual withdrawal of monetary stimulus by the world’s largest central banks risks removing one of the key supports to global asset prices, including PCL. In the event that tapering triggers a sharp fall in asset prices, the response of sterling will be key. If Bank of England Governor Carney can convince markets that a policy tightening in the UK remains a very distant prospect, sterling may fall against the US dollar, and against other currencies more generally. This would mitigate some of the downward pressure on PCL values.”

Prime London house prices predicted to rise 24% over 5 years

The prime central London story

Expectations that prime central London house price growth would slow to zero this year have proven premature and Savills now forecasts that the market will continue to rise for the next 18 months, extending a record two and a half years of steady, single digit annual price growth.   

The firm now anticipates price rises to average 6.0 per cent this year, 3.0 per cent in 2014, with five year growth remaining more or less as forecast, at 24.3 per cent, following uncertainty in the run-up to a general election.

Prime Central London five year house price forecast table

Despite fewer ‘big ticket’ trophy home buyers in the market, sales of properties worth £5 million or more across the market have totalled a record £2.6 billion in the first half of 2013, up 23 per cent on the same period in 2012. 

Stamp duty and associated tax rises failed to trigger the anticipated slowdown of the prime London market, but the first six months of 2013 have confirmed that the taxation of prime residential property has become a political bargaining chip.  As such, Savills forecasts that the general election in 2015 will trigger a lull in prime central London price growth, but that growth will resume in 2016 assuming no significant changes to the taxation of high value property.

“There is a clear ‘bank of London’ effect that is impacting both international and domestic buyer behaviour,” says Cook. 

 “At a global and UK level London is viewed as a relatively safe place to own property and once invested buyers are reluctant to withdraw their equity.”

Strong growth in prime South West London housing market

The prime London residential market recorded the strongest price growth in the second quarter of 2013 for over a year, defying expectations that values would flatline this year and continuing a period of steady, if unspectacular, capital appreciation.

Across prime London prices rose 2.5% between April and June, bringing annual growth up to 6.6% from 5.5% at the end of the first quarter. But there are significant differences in performance between locations and price bands that reflect differences in buyer profiles, reasons for purchase and their perception of the market, with evidence that some market segments are now looking fully valued.

South West London leads

The strongest growth was seen in the predominantly domestic markets of prime South West London (running from Fulham to Richmond and Battersea to Wimbledon), where values rose 3.2% in the last quarter. Annual growth now stands at 8.5%, much higher than the 4.4% seen in prime central London. Despite reduced city bonuses, these markets are benefiting from wealth accumulated prior to the downturn, new wealth creation, especially from West End hedge funds, and increased buying activity from international buyers working and resident full time in the capital.

At the same time, domestic wealth has resisted a move out of the capital in this recovery cycle, resulting in a concentration of demand in prime South West London and similar markets such as Islington.

The best performing local market has been Fulham, which is increasingly seen as a hybrid between central London and South West London by showing some of the attributes of both markets at a price point between the two. This reflects the fact that it is undergoing a process of ultra-gentrification, attracting international and domestic buyers who, despite significant wealth, have been priced out of the central London market.

Prime central London values rose by just 1.6% in the quarter and 4.4% year-on-year on average. Here, price growth has become concentrated in the very core locations of Mayfair, Chelsea, Belgravia and Knightsbridge, which are the primary focus of new global wealth.

Other central London markets have remained more reliant on old world money and price growth has become more subdued. Locations such as Kensington, Holland Park, Notting Hill and St John’s Wood have been more sensitive to the effect of stamp duty changes for properties over £2 million than the core central locations. This has focused buyers’ minds on whether certain segments of the market are fully valued at this point in the cycle.

Properties worth over £10 million have outperformed the rest of the market since the beginning of 2005 with values 38% above their pre-crunch levels. For the moment at least, values appear to have plateaued, although transaction levels remain robust.

Indeed, in the first half of the year there were in excess of 85 transactions of properties above this price level, a 30% increase on the same period in 2012, leaving little new build stock in this price bracket available to buy.

Two-tier East of City

In the East of City, the divergence between the markets of Wapping and Canary Wharf continues, with the former seeing annual price growth of 5.8%, compared to 2.3% in the latter.

Whilst this means prices for prime residential property in Canary Wharf have recovered to their pre-crunch levels for the first time, prices in Wapping are some 20% above those levels, having performed much more in line with the prime London market as a whole.

Annual price growth exceeds 10% in prime Central London

KEY POINTS:

·      PCL house prices growing at fastest rate since the financial crisis

·      Prices rose by 4% in Q2 alone, taking annual growth to 10.2%

·      Improvements in economy and job prospects have boosted confidence

·      Cluttons believes this rate of growth is unsustainable

Prime Central London house prices are growing at their fastest rate since the financial crisis of 2008, with provisional figures for Q2 2013 showing quarterly growth of 4%, bringing annual growth to 10.2%, reports property consultants Cluttons.

Improved sentiment in the capital in terms of both the economy and job prospects, which are both showing signs of growth, have spurred even more buyers to step into the market or make a long overdue move.

While the supply of properties for sale in London sits at a record low, with Londoners keen to retain their exposure to the capital's market, demand for property has grown with an increase in overall job numbers, which now stands ahead of the economic peak. There has been a particular acceleration in highly skilled and highly paid employment, which is quickly translating into demand for high value homes.

Cluttons does not expect this pace of price growth to continue, however, as it has moved ahead of the long term trend and well ahead of income growth, which is unsustainable.

Sue Foxley, head of research at Cluttons, said: "The current fervent pace of growth will temper over the summer but remain positive in light of the limited supply, tending towards the long term average of around 7% for 2013 as a whole.

"Despite this, first time buyers and those seeking to move up the ladder to accommodate expanding families will face a marked reduction in their buying power in Central London, compared to a year ago. On the up side, those looking to cash in on the record prices in the capital before the summer slowdown are well positioned to make that move."