Mon, 05 Nov 07
After two years of very strong price growth, the central London residential market has seen price inflation slow rapidly over the past three months. The impact of the credit crunch and a weaker City economy have contributed to a more sober market...
A clear differential between the performance of top end properties (£5 million+) and the rest of the market, illustrates the strength of the super prime market with demand from international buyers remaining very strong.
Strong price growth earlier in 2007 has led to considerable price growth over the past 12 months in central London. The Knight Frank Prime Central London index reveals that prices grew by 34.1% in the year to October 2007. The rate of growth has slowed with 0.3% growth recorded during October; the slowest monthly growth recorded since July 2005.
During the Summer, at the height of the central London boom, prices were rising by over 3% per month, with 3.9% recorded for July. Price growth at this level was unsustainable and the credit crunch in August and September effectively hastened the slowing of the market.
Divergence in performance
Prices for £5 million+ properties rose by 4.8% in the three months to October, whereas prices for properties in the £1 to 2 million bracket managed only 2.3% - illustrating the divergence in performance between prime and super prime property.
We have seen a sellers market replaced very quickly by a buyers market. The new market sentiment means that vendors are having to compete much harder to achieve timely sales and ambitious pricing has effectively ended across the prime and mainstream markets.
We would note that price growth in London is still marginally positive, and whilst we expect very low growth to characterise the market over the next few months we believe that demand pressures to mean pricing in London will remain positive through 2008.
We have forecast 3% growth for next year, although we expect prices above £5 million to rise by 8% or more during the year on the back of international demand and particularly demand from oil rich and commodity rich countries (Russia, Kazakhstan, the Middle East in particular).
There are two schools of thought regarding the longevity of the credit crunch. There are those who think the worst is over, who point to the record levels hit by equity markets across the globe and to the fall in overnight and three month money market rates since the September peak.
The alternative view is that market uncertainty has not disappeared. This more negative view places great store on the fact that whilst debt securitisation was supposed to spread risk, the lack of transparency engendered in the market means in many cases there is no obvious way of assessing where risk may still be concentrated.
The initial impact of the credit crunch is being felt by the City economy. For a period, profitability will be reduced, jobs will be cut and bonuses reduced. The actual quantum of these processes is still uncertain.
Whereas the City economy is experiencing a more difficult phase, the wider economy is performing fairly well. GDP growth is forecast to slow from 2.9% to 2.0% next year, which would represent a fairly benign slow down. Price inflation and earnings growth are easing, and the pressure on base rates has abated.
With the exception of the City economy, the wider picture is relatively positive and yet the housing market appears from most measures to be hitting a more difficult phase, why? The problem is that affordability is so tight that market sentiment is now hugely important in determining the next direction for the market.
UK market entering ‘weaker phase’
Consumer confidence monitors report that people are not worried about significant economic changes, i.e. loss of employment, but they are concerned about every day issues: cost of living, taxes and the outlook for interest rates for example.
Our current view is that the UK market is likely to enter a weaker phase. The next 12 months will feel a lot like late 2004 and early 2005; a period when price growth slowed to low single digit levels, and more importantly a period when buyers looking to strike deals were met by over-ambitious vendors.
We believe that prices will rise next year by 3% and sales volumes will fall 12% on the level seen this year, although they will only be down 5% on their long term average.
The prime markets are likely to perform better than the mainstream markets but not by a wide margin. Vendors of the very best properties will still be able to name their own price (almost), but for the rest of the market price growth will be noticeably lower than that seen in recent months.
Prime Central London Residential Sales Index, results
12 month change
6 month change
3 month change
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