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For London prime housing buyers, a penny saved is a penny earned
AFTER three years of price falls, there are signs that housing values in prime central London may be bottoming out, according to the latest quarterly Savills prime London index.
Values in the UK capital's most expensive central locations slipped a marginal 0.9 per cent in the final quarter of 2017, while annual price falls totalled 4 per cent, in line with Savill's expectations.
The consultancy's research view is that prime central London is ahead of the curve in adjusting to current market conditions.
Values are on average 15.9 per cent below their 2014 peak ahead of the first significant stamp duty increase at the time.
(The 2014 stamp duty increase was the first of a series of increases that affected higher-value transactions, where the previous method of flat rates of stamp duty at different price points was changed to a progressive system with much higher tax rates for the proportion of a property's value above certain price points. For example, the portion of the value of a home purchase above £1.5 million, or S$2.8 million, became liable to a 12-per-cent rate.)
But the rate of price decline has slowed, and values are now finding their support level, even if no growth is expected for the next two years.
In contrast, the more domestic outer prime London markets have not seen values fall to the same extent as the higher-value central locations over the past few years.
Further small falls are expected this year, with lower expectations for five-year house price growth.
What happens next?
What buyers and sellers want to know, of course, is what happens next.
Forecasting home prices is never completely straightforward, and the current backdrop of political and economic uncertainty in the UK only increase the challenges.
Getting it right presupposes that we are making the right economic assumptions, can predict policy direction, and have the ability to anticipate the fickle nature of buyer sentiment.
Suffice to say that we at Savills base our forecasts on a wide range of indicators, including knowledge of previous housing market cycles.
What we think is in store for the UK capital's prime residential markets is that, having seen double-digit falls since the stamp duty increases of late 2014, home prices in London's prime central locations are beginning to find a support level, but uncertainty over the impact of Brexit points to two further years of no growth.
Thereafter, when uncertainty clears and central London's prime residential real estate again represents identifiably good value, prices will bounce.
By the end of 2022, we expect values across the city's most-established core prime central zones to have risen by a fifth, or 20.3 per cent.
While this may look ambitious in the current climate, it represents a departure - likely permanent - from the historic trend, which saw an average annual price growth of 5.7 per cent above the rate of inflation between 1979 and 2014.
During that period, London was transformed from a purely domestic market in the pre-Thatcher years to one of the world's leading global cities.
This rocket-fuelled promotion phase cannot be repeated, but London can - and we believe it will - retain its position among an elite group of world cities for its low-risk status.
The wider prime London market, beyond prime central London, is more dependent on domestic buyers employed in the financial and business services sector.
For these domestic buyers, mortgage affordability is a greater concern and this looks set to constrain price growth. Our forecasts for outer prime London are therefore for small falls of 2 per cent this year, with five-year growth expected to total 10.2 per cent, below the 20.3 per cent forecast for prime central London.
We think the risks surrounding London's position as a global commercial centre have been overplayed. Whatever the challenge from other cities, London will almost certainly remain a key global financial centre and develop as one of several European hubs for the growing tech sector.
Its prime markets will therefore benefit from new domestic wealth generation as well as wealth from international buyers.
- The writer is Savills head of UK residential research