Analysis suggests prime central London property values will stagnate in 2017

Prime property values in central London have dropped for the first time since the recession, although homes priced below £2 million have seen values resisting the slowdown, new research shows.

Indeed, this segment of the market has outperformed the rest of prime central London where average capital values are down 2.3% over the last 12 months, according to the latest residential market outlook report from real estate services firm Cluttons.

It points out that London’s residential market continues to be subjected to an unprecedented slowdown fuelled by the economic anxiety around the looming Brexit negotiations, stubborn affordability issues and the stamp duty changes that have stifled the buy to let market.

Cluttons forecasts that overall prime central London residential values will be largely stagnant next year, before growth returns in 2018 to around 0.5% and stabilises but will be down 2% to 3% per annum between 2019 and 2021.

According to Faisal Durrani, Cluttons head of research, the upcoming changes to mortgage interest relief in 2017 will be a further blow to an already repressed segment of the market.

‘This toxic cocktail of growth dampeners appears to have hurt the top of the market hardest, however properties priced at under £2 million are still holding their ground,’ he said.

‘Regardless of location, properties under £2 million have outperformed the wider prime Central London average and this is reflected in our market experience as well. On an annual basis, properties priced under £2 million are down in value by 1.1%, while everything priced above £2 million has fallen by a sharper 6%,’ he added.

The analysis report explains that some submarkets in prime central London have been impacted disproportionately by the ongoing price correction due to a higher density of luxury property. In Kensington and Chelsea, for example, overall year to date sales levels are down 36%, while transactions for homes priced at over £5 million have fallen by 45% so far this year, according to data from the Land Registry. Across prime Central London as a whole, year on year transaction volumes are similarly down by 34.8%.

Beyond the prime core, some markets continue to register price growth, particularly for homes priced around the £500,000 mark. Greenwich has seen values rise by 1.3%, Deptford by 1.7% and Blackheath by 1.9% in the third quarter of 2016.

Cluttons also points out that plans to eliminate all lettings agency fees for tenants is a further blow to an already weak buy to let market. ‘We are less concerned with the associated potential cost of this change but we believe the constant anti buy to let rhetoric from the government risks further alienation of a core investment group,’ said Durrani.

‘The buy to let industry has been critical in delivering rental property into a market where there is an ever-expanding Generation Rent class who will continue to be priced out of the housing market in the long run,’ he added.

Overall however, Cluttons believes the Brexit negotiations are likely to continue impacting the residential market till the end of next year at least, before there is the potential for upward movement in values.

‘The tumultuous political and economic conditions continue to create a challenging forecasting environment, so we have run two forecast models in an effort to quantify the uncertainty that lies ahead,’ Durrani pointed out.

‘What is clear at this stage is that 2016 is shaping up to be the weakest year for the prime central London market since 2009, with both our models suggesting we will end the year at close to -4%. We expect the Brexit negotiations to take between two to four years, prolonging the uncertainty plaguing values. Over the next five years, growth should touch 7.7%, down sharply on the 35.7% rise recorded between 2011 and 2016,’ he said.

James Hyman, head of residential agency at Cluttons, believes that despite the political uncertainty surrounding the market the firm expects activity to increase in the first part of 2017 as 18 months of pent up demand is released.

‘In many cases buyers have been sitting on their hands waiting for the right time to buy. Yet the market hasn’t crashed, the autumn statement provided no respite in stamp duty and Central London prices are broadly holding up,’ he explained.

‘People at the upper end of the market who have sat on the fence and rented property for the past year or so are now deciding it’s time to bite the bullet and buy. Over the past few weeks there has been an upturn in new applicants and buyers and we expect that trend to continue post-Christmas,’ he added.