Pent up buyer demand, which built up through 2008 and the early months of this year, has flowed into a market that is increasingly short of quality stock, says the latest quarterly index from Savills Research.
It shows that prime central London house prices rose by 4.3% over the past three months, effectively wiping out the falls seen in the first three months of the year.
'By any measure, this is a significant quarterly growth figure and the beginning of some price stability, consistent with a market that could bump along the bottom without showing sustained growth until 2010,' said Yolande Barnes, head of residential research at Savills.
Analysts point out that while the economic fundamentals did not change significantly in the first half of 2009, there has been a notable change in sentiment amongst buyers in the second quarter of this year.
In the early part of the year, buyers were waiting for signs that the market was sufficiently close to the bottom before they committed to buying. This meant that prices had to fall by as much as 25% before deals were agreed.
Now potential buyers have become more comfortable and taking advantage of price falls. 'The prime central London market is now perceived as a lower risk environment than it was a year ago. A herd mentality is definitely at play in the perception of market value and competitive bidding is on the rise,' explained Barnes.
'There will be a lag before improved sentiment brings additional properties to the market. Discretionary sellers have been in short supply and so buyers have been chasing shrinking stock levels,' she said.
But it is not yet the start of a major recovery. The true test of the market improvement will come in the autumn, according to Barnes as currently the market is heavily dependent on the sentiment of cash buyers, as mortgage dependent buyers remain relatively thin on the ground.
Also a lack of bonus money has meant that buyers from the financial sector, who have traditionally accounted for half of all buyers in the prime London markets, now account for just 40%.
An improvement in the economic outlook and city employment projections in particular are needed to ensure that the momentum is carried though to the autumn. But a worsening economic outlook or even a dearth of noticeably good news could erode the spring price growth again by the year end.
'Irrespective of short term price movements, we consider that improved underlying purchaser activity means that we are into the first stages of recovery in the prime central London market and this sector will eventually lead the rest of the UK residential market into recovery,' concluded Barnes.
