PCL was particularly affected by the pandemic, as overseas investors couldn’t get to Britain during this time and prices started to fall, but it has recovered since restrictions were removed and society reopened.
Savills now expects PCL’s house prices to increase by 4% across 2022, a fall from the 8% growth previously forecast in November 2021. This, it says, reflects a slower pace of return of international buyers than had been forecast. What’s more, the war in Ukraine and current domestic political issues – with the Conservative Party contest to decide on the next Prime Minister currently underway - have caused a degree of caution that ‘is constraining price growth’, Savills says.
The firm does, however, anticipate a more significant recovery in 2023. To this end, it has forecast growth of 7%, up from 4%, next year, with the pace of demand from foreign buyers expected to increase again.
Over the next five years, meanwhile, it predicts that prices in PCL will rise by a total of 21.6%, even in spite of a slight slowing of growth in the run-up to the expected general election in 2024.
“Strong activity over the past six months, the relative value on offer and the prospects for global wealth generation together give us confidence that prime central London will continue to recover steadily over the next couple of years,” Frances McDonald, research analyst at Savills, said.
“However, the pace of return of international buyers has so far been slow, holding back the more rapid recovery we had previously anticipated. Early indicators suggest that things should improve over the second half of the year and into 2023, as high-net-worth buyers have gradually started to return to traditional prime postcodes such as Chelsea, Belgravia, Kensington, Mayfair, Notting Hill and Holland Park over the past three-months, boosting the outlook for price growth beyond this year.”
She said that, in the longer term, the need to register beneficial ownership of homes held in offshore vehicles have the potential to curb some demand amongst a limited number of buyers.
“But, while historically there have been many benefits to using offshore vehicles to hold UK property, the tax advantages have largely already been removed. As such, we have only slightly reduced our outlook for prices over the next five years,” McDonald added.
Outer prime London suffers from cost-of-living squeeze
Savills’ latest research also concluded that, in the more domestic markets of outer prime London, ‘continued unmet demand from those looking to upsize and a lack of suitable stock will support price growth in the short term’. As such, it has forecast that price growth in these markets will average at 5% this year.
However, while the prime markets – which are typically thought of as the top 5-10% of homes by value in the UK – are typically more resilient to interest rate rises and the increased cost of debt, Savills says they are not completely immune.
It expects to see signs of price sensitivity creep into the market over the next six months, resulting in slower growth from 2023 onwards. It believes this will cap price growth at 13.6% over the five years to the end of 2026.
“Over the medium term, the return of workers to the capital will fuel demand. Even as hybrid working becomes more conventional, workers still value proximity to the office and some of those who bought a home in the country during the pandemic are realising the need for a pied-à-terre, further supporting demand for flats,” McDonald adds.
“From 2023 onwards we are forecasting slightly lower levels of price growth with rising pressure on buyers’ spending power, though the effect of earlier than expected interest rate rises is likely to be offset by an easing in mortgage regulation and an increased flow of capital coming out of central London.”
Long-term outlook good for Scotland, the Midlands and the North
While the pace of growth in the prime regional market has started to slow, following two years of unprecedented price growth (up 16% since March 2020), activity continues to be strong and there remains an imbalance between supply and demand across much of the market. This, Savills says, will support price growth in the immediate future.
The property firm forecasts that prime regional markets will grow by an average of 5% in 2022, led by growth in London’s suburbs (up by 6%). Prices are predicted to grow more steadily thereafter, increasing 18.8% over the five years to the end of 2026.
“Growth in the medium term will depend largely on further interest rate rises and the rising cost of living which will limit buyers’ spending power. This will have the most significant impact on markets where buyers typically take on more debt,” McDonald concluded.
“As a result, we are likely to see a continued slowing of growth towards the end of this year, and whilst we are not expecting a significant correction in price levels, realistic pricing from vendors will once more become all-important. This will be particularly true for markets which have seen the strongest growth since the start of the pandemic, namely London’s suburbs and the coastal and rural markets in the south of England which performed phenomenally over the course of the pandemic.”
In the longer term, the prime markets of Scotland, the Midlands and the North of England are expected to perform the strongest. This, Savills says, is due to greater capacity for growth, compared with those in the South).
As such, Savills has forecast +21.7% and +22.8% total growth over the next five years.