Tax concerns are the driving force behind fresh price falls across prime London
Nick Maud, Director, Residential Research
Prices across London’s prime central districts continue to reflect their greatest value in over a decade, down -22.4% on their 2014 peak, with a higher proportion of savvy domestic purchasers taking advantage of the buying opportunity by securing their main home here. Ripples of caution and negative sentiment continue to emanate from October’s headline Budget announcements, combined with concern around prevailing global economic volatility. This has been borne out in quarterly price falls of -1.5% across prime central London, the most significant decrease since the latter half of 2016, in the immediate aftermath of the Brexit referendum. Annual price falls have continued on a gradual, though uninterrupted downward trajectory since March of last year, culminating in annual falls of -3.7%, a level last observed in the summer of 2019 amid the tail-end of the May government.
While the split between overseas and domestic buyers has not changed dramatically in a more subdued market, we have seen an increase in the proportion of international sellers. These sellers are more weighted towards investors and second home owners. Elsewhere, main home buyers are also trending younger, with those under 40, who are less likely to be immediately concerned about inheritance tax liability, accounting for a greater proportion of buyers. Consequently, the classically more domestic neighbourhoods around Notting Hill have proven to be the most resilient, falling by only -1.4% on an annual basis.
In the outer prime districts, average prices have seen little movement, with quarterly growth nudging only marginally into negative territory at -0.5% and annual growth stalling at 0.0%. This relative resilience has in part been underpinned by continued demand from needs-based, domestic buyers, who are opting to remain in the capital rather than migrate to the commuter belt and other prime regions. This is partially underpinned by a work culture which has reverted to being more office-centric.
Overall, the West of London was the most resilient outer prime region, seeing annual growth of 0.6%, followed by the South West of London where price grew by 0.5% over the same period. Aspirational, family-orientated areas like Brook Green (annual growth of 1.3%), Putney (2.5%) and Wimbledon (3.4%), all of which offer easy commutes into the employment hubs of the West End and the City, were the strongest performers in these regions.
Data from TwentyCi illustrates the longer-term interplay between supply and demand, which informs the current state of activity across prime London. The charts below show the 12-month rolling average for agreed sales net of fall-throughs, as a proxy for demand, and the same rolling average for new instructions, as a proxy for supply, by month over the last five years, indexed against the long-term average for both.
The immediate aftermath of the pandemic saw levels of demand outstrip supply and the overall average, as the lockdown restrictions were lifted and unleashed a wave of pent-up demand in what came to be known as the ‘race for space’.
But by the second half of 2022, as inflationary pressures bit and interest rates rose in response, demand began a downward trajectory, dipping below the five-year average in July 2023, where it has remained since. At the same point, levels of supply, which had been trending upwards since the start of 2022, began to exceed both demand and the five-year average.
This dynamic has placed downward pressure on transactional activity and, therefore, pricing, manifesting in the generalised price adjustment that has taken place. In the market over £2 million, demand was at 3% below the five-year average and supply 12% above by the end of June, with a greater mismatch in the market over £5 million.
All eyes are now on the Autumn Budget in anticipation of any further tax initiatives aimed at high net worth individuals and above. However, it appears that the message may have already reached the Treasury, with a potential reversal on the application of inheritance tax to overseas assets held by ‘non-doms’ being floated in the press.
While such overtures may now be too little, too late, it does hint at a more supportive direction of travel. The real question is whether the government has the wriggle room to make such changes, meaning that, all things considered, we expect buyer caution to persist into the autumn market.
This is despite the potential for domestic demand to benefit from further interest rate cuts and a gradual easing in the cost of mortgage finance.
That means astute purchasers have a window of opportunity to secure prime London homes in a less competitive marketplace.
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