What is the outlook for the Prime London property market in 2023?
By Alpa Bhakta, CEO, Butterfield Mortgages Limited
Without question, 2022 was a difficult year for the UK’s property market to navigate. Inflation shot into double figures, interest rates rose quicky and Westminster appeared to be perpetually embroiled in political upheaval. In combination, these factors have contributed to a significant amount of uncertainty, yet the market has remained resilient.
According to Halifax, for example, while the annual rate of growth has slowed, December’s house price index shows that prices increased by 4.7% last year. As such, compared to 2021, the average house price grew by over £10,000 and remains well above pre-pandemic levels, according to the Office of National Statistics.
In the capital, particularly in the prime central London (PCL) market, performance was equally strong – if not stronger. Overall, prices in London bucked the national trend and grew by 0.2% in December, for instance. Meanwhile, since the pandemic, the PCL market has grown by 2.4%, and demand for properties valued £5 million or higher was at its highest level in the first nine months of a year since 2006 in November 2022.
As such, as we venture further into 2023, perhaps the prospects for the PCL market this year look brighter than one might imagine.
The wider market will cool
Admittedly, the wider market is expected to cool in 2023 as a result of rising interest rates, incessant inflation and the economic fallout of Liz Truss’s mini budget. As such, the Office for Budget Responsibility foresee a 9% drop in prices this year as buying power is reduced. Indeed, they have already begun to dip.
According to Nationwide, for example, growth slowed to its slowest level since mid-2020 in December, while prices declined for the fourth time in a row. As many of these economic headwinds remain in 2023, it would be difficult to argue that prices won’t diminish further.
A brighter outlook for the PCL market
That said, the PCL market shouldn’t see prices decline to the same extent, as its recovery appears to be gathering pace. In Q4 2022, for instance, data from Savills shows that properties valued £2+ million fell by just 0.7% in the quarter and sat 2.3% above Q4 2021’s levels, while prices for the rest of the capital fell -2.1%. The PCL market clearly acts somewhat independently to the rest of the market, but why?
For one, the lack of supply in the PCL market. Indeed, when combined with demand volumes that look set to grow by 30%, this trend should continue into 2023. Therefore, while the wider market can expect sharper dips in prices, Beauchamp Estates contend that the top echelons of the market could see growth of 1-2% in the next 11 months, or at least remain at their current level.
The nature of buyers is another differentiating factor. Due to the prevalence of high-net worth buyers, the harsh effects of economic headwinds aren’t going to be felt to the same extent. As such, as buying power will likely be most impacted in the middle and lower echelons of the market, the same trend shouldn’t occur as disruptively in the PCL market.
Consolidating this insulation from domestic economic turmoil is the increased presence of foreign investors in the PCL market, who accounted for 57% of property investment in the capital last year. Following the mini budget in September, a run on the pound meant that property in London was 25% cheaper for overseas buyers at the end of September 2022 than it was in July 2021. As long as the exchange rates remains favourable, this trend should continue to help support demand and prices in the PCL market in the months to come.
Finally, rising rental prices could encourage an influx of PCL buyers looking to add a buy-to-let (BTL) property to their portfolios in 2023, supporting property prices and buyer demand despite the wider economic landscape. As opportunities for higher rental yields increase in number, and demand sits 26.7% above the five-year average, data suggests that the PCL rental market will grow by a further 6% in the next 11 months. Following a year where rental prices grew by 17.8%, there are certainly further opportunities to be had for homeowners and investors in this segment of the market.
PCL still offers opportunities
Uncertainty in Westminster and the economy will continue in 2023, particularly as the Bank of England resumes its battle against inflation with higher interest rates. However, the PCL property market still benefits from attractive investment opportunities, which should maintain demand levels. Therefore, in combination with a lack of supply, the outlook for PCL property in 2023 appears bright.
That said, lenders must be prepared to help homeowners and investors access these opportunities, which will require plenty of flexibility and initiative in the midst of such an uncertain economic climate. Those that can offer these qualities will be in a stronger position to benefit from the market’s promising recovery in the months ahead.