London Market Update - Autumn
Fri 01 Oct 2010
The Central London residential market continued to record positive price inflation during the third quarter of 2010 albeit at a slower pace than that seen earlier in the year. Demand has stabilised in recent months, while supply levels have increased slightly alleviating the shortages observed throughout much of 2009.
The narrowing gap between demand and supply will likely see a further softening in the pace of price inflation during the remainder of the year, while transaction activity is expected to remain relatively stable.
The London economy continued to strengthen during the first quarter of the year according to figures published by GLA Economics with the annual growth rate, measured in terms of gross value added, standing at -0.4%. This is compared to the annual rate of -2.7% recorded for the final quarter of 2009. The comparable figure for the UK economy was -0.1% in quarter one.
Growth in the UK economy continued to improve during quarter two with the volume of output rising by 1.2% during the three month period according to recent figures published by the Office for National Statistics. This is highest quarterly rate recorded since the first quarter of 2001 and equates to an annual increase of 1.7%. These figures suggest that the London economy will also record positive annual growth during quarter two.
On an equally positive note, it was reported during September that some of the Citys largest professional services companies, namely Deloitte, Ernst & Young, KPMG and PWC are currently hiring hundreds of management consultants, signalling improved conditions in the City jobs market.
The annual rate of inflation, as measured by the consumer price index, stood at 3.1% in August unchanged from the previous month. This has remained above the 2% target rate since the end of 2009, however the governor of the Bank of England, Mervyn King, has indicated that while a number of factors will maintain the rate above 2% for some time, space capacity in the economy will eventually bring it back towards target. As a result, it is expected that the Bank of England will leave key interest rates unchanged at 0.5% until at least mid-2011.
Central London Market
The prime central London market returned to positive price inflation in September following a lull during the summer months with latest results from the Marsh & Parsons index recording a 0.4% increase during the month. Quarterly figures however reveal a steady decline in the pace of price increase since the beginning of the year to reach 0.3% in quarter three compared to 1% in quarter two and 3.9% in the opening three months of the year. This brings total price inflation in the year to date to 5.3%.
A number of locations within the central London market witnessed particularly strong growth during the first nine months of the year, most notably Fulham with price inflation of 12.3% for the period. This was followed by growth of 8.2% in North Kensington and 7.5% in Battersea. That said, prices in most locations have begun to level off in recent months reflecting an increase in supply levels since the beginning of the year.
An analysis of a sample of properties traded by Marsh & Parsons yields some interesting results. In particular, notwithstanding the difficult borrowing conditions faced by first time buyers, this cohort remains the strongest purchasing category responsible for 39% of all properties traded during quarter three. This remains unchanged from the previous quarter and has strengthened from the 35% observed in the opening three months of the year. First time buyer demand was particularly strong in Clapham, North Kensington and Balham, accounting for over half of all transactions in these locations during the first nine months of the year.
Investor activity increased slightly during quarter three amounting to 19% of transactions compared to 18% in quarter two. This group was predominantly active in Kensington and Holland Park purchasing 39% of all properties traded in these locations since the beginning of the year.
The proportion of individuals purchasing an additional residence also strengthened in the three month period to September to reach 15% compared to 13% in quarter two. This has more than doubled since the first quarter of the year. In contrast, activity among individuals trading up has declined since the beginning of the year from 27% of purchasers in quarter one to 18% in quarter three. Demand from individuals trading down has remained relatively stable over the nine month period representing 4% of all purchasers during quarter three.
Source: Marsh & Parsons Research (South West London Offices)
Cash buyers remain a key element of demand in certain locations most notably Chelsea, where this cohort accounted for 70% of all transactions since the beginning of the year. In addition, approximately 52% of all properties traded in Kensington, Notting Hill and Pimlico during the first nine months of the year were purchased by cash buyers.
Demand from overseas purchasers has also eased during quarter three to comprise 14% of all transactions compared to 17% in quarter two. Just over a third of these were from Asia, primarily China, Hong Kong and Singapore. In prime central London, during the first nine months of the year, overseas purchasers, accounted for 42% of all properties traded during the period.
On the supply side, Marsh & Parsons data reveals that in line with last year, stock levels remained relatively stable during the summer months. That said, stock levels at the end of September, which include properties available for sale and those under offer, were 35% greater that a year earlier. This has helped alleviate shortages that were a characteristic of the market during 2009.
An analysis of the wider London region reveals continued positive price inflation during August, with average prices increasing by 0.9% according to latest figures published by the Land Registry. This is the sixth consecutive monthly increase and brings the average property price to 345,734. On an annual basis, average prices in London increased by 11.4%. The comparable figures for the England and Wales region stood at 0.3% for the month and 6.7% for the year.
The Marsh & Parsons Sentiment Barometer is a monthly barometer which assesses current market conditions and compares them to those in the previous month and the previous year. It assesses key market indicators including demand from all purchasing cohorts, viewing and applicant levels and stock levels.
The September results reveal that demand overall stabilised during the month. In addition, the majority of central London locations reported no change in demand from most purchasing cohorts compared to a year ago, although many locations have experienced an increase in investor activity compared to September 2009 levels.
The majority of respondents purported that demand from first time buyers, investors and overseas purchasers remained stable in September compared to August levels. That said, 33% of locations reported a decline in demand from first time buyers reflecting stricter lending criteria, with higher mortgage rates for purchasers with lower deposits. Demand from individuals trading up was very mixed across locations during September, with a third of respondents indicating no change from the previous month, while a further 33% reported an increase following the end of the holiday season.
The majority of locations also reported no change in demand from first time buyers and individuals trading up compared to September 2009, although a quarter of all respondents stated that demand from these cohorts had declined over the twelve month period. Similarly demand from overseas purchasers remained unchanged compared to a year ago in the majority of locations, 63%, while the remainder reported a decline.
Interestingly half of all branches purported that investor demand increased compared to a year earlier with 12% indicating no change, highlighting the underlying strength of the lettings market.
The volume of applicants fell across 63% of locations when compared to September 2009 levels, with only 12% of areas witnessing an improvement. Similarly, over half of all respondents, stated that applicant levels had decreased compared to August. That said, a relatively large proportion of locations, 44%, experienced an increase. The proportion of branches reporting a rise in stock levels increased in September with 44% witnessing an increase compared to August and 88% reporting stronger levels than in September 2009.
The volume of transactions in the London region continued to surpass 2009 levels with latest figures from the Land Registry estimating total transactions for June at 8,212, a significant 33% increase on the same period in 2009. Although this remains well below the historical average, it must be noted that the three month average level of transactions has been on an upward trend in recent months. Interestingly the number of properties that sold for over 1-million in London rose by 65% compared to June 2009.
In comparison transaction levels in England and Wales stood at 59,390 in June, representing an increase of 9% on a year earlier. Furthermore, between March and June, transactions averaged 53,089 per month, representing an increase of 21% on the same period the previous year, indicating an improvement in recent months.
Latest figures published by the Bank of England reveal that gross mortgage lending by the Major UK Lenders fell by 3.1% during August to reach 9.5-billion. This is also 3.1% lower than the level recorded twelve months previously. This decline reflects reductions in both lending for house purchase and remortgaging activity. In particular, lending for house purchase stood at 5.9-billion in August, compared to 6.1-billion the previous month, while remortgaging activity totalled 2.7-billion in August, 3.6% lower than the July level.
Bank of England figures also show that the level of mortgage approvals for house purchase fell by 2% during the month to reach 47,372. A comparison with August 2009 reveals a 10.8% decrease in the level of approvals. It must be noted however, that total approvals in the first eight months of 2010 at 386,747 were 6.4% ahead of the same period in 2009.
Following a strong start to the year, when some central London locations saw prices returning to 2007 highs, the pace of inflation has softened recently, as the shortages that were a feature of the market during 2009 have largely been eliminated. This is likely to continue during the remainder of the year as supply levels continue to increase, and demand begins to level off amid growing uncertainty among consumers over the economic outlook coupled with tighter lending conditions.
In particular, while the UK economy recorded very robust growth during quarter two, this is expected to be considerably lower during the remainder of the year as a result of a number of factors. This includes spending cuts announced by the Government on October 20th, further tax hikes that are due to come into effect in 2011, and the dampening effect of weaknesses in the international environment on the demand for exports.
Furthermore, if the reforms proposed by the FSA are introduced next year, this would make it more difficult for individuals to obtain mortgages, further dampening the residential market.
While these will filter through to the central London market, the residential market is expected to remain relatively resilient sustained by the underlying strength of the lettings market, subsequently, demand from investors and overseas purchasers is expected to remain stable during the remainder of the year.