London Prime Market Monitor - Q2 2012
Tue 07 Aug 2012
- Non-central prime outpaces prime central London in quarter as tightening supply pushes buyers to south and west
- Annual prime property price inflation stands at 9.6%, with quarterly growth hitting 3.5%
- Prime London property prices appear recession proof as prices rise 6% since double-dip began
Recession busting price rises
Our inaugural London Prime Market Monitor demonstrates London continues to operate as a market apart from the wider national housing market. Property values in the capital have gone from strength to strength in the second quarter of 2012, despite the introduction of the 7% stamp duty tax on properties worth at least 2m in the latest budget. With values in prime areas rising by 9.6% annually, the budgetary changes have so far failed to unsettle the prime market with buyers likely to be in the black after a single year of investment.
A second recession, too, has yet to knock the wind from prime Londons sails, despite its impact on the financial services sector. In fact, London property has largely proved to be double-dip recession-proof, with values 6% higher than those in Q4 2011, when the economy first began to contract once again.
International investment has been pivotal to continued annual price growth, with international buyers comprising 31% of all prime buyers. The safe-haven effect is showing no signs of fading as the eurozone crisis drags on, and Londons bricks and mortar is serving as one of the principal stores of wealth for high net worth individuals. With new tax measures on the wealthy being introduced in France, combined with the financial instability in many eurozone countries, this international component of the market will stay in place, acting as a buffer against the impact of the recession on UK purchasers buying power.
A power shift from central prime?
Prime central London is still leading the way in the longer-term, with average annual price growth surpassing the 10% mark in the three months to June.
However, over the last quarter, it is less central areas that have seen the most rapid price growth, with prices growing 0.4% faster than the average of their traditional prime central counterparts, with areas such as Brook Green and Barnes seeing faster increases than locations like Kensington. As a result, quarterly price growth in the prime market as a whole has exceeded that of prime central London.
This has been reflected in the slight reduction in the difference between the value of the average property in prime London and an average property in prime central London. In Q2 2012, buyers were paying an average premium of 48.7% to purchase property in prime central London locations, compared to the average price in prime London. Whilst higher than a year ago, the premium is showing signs of decreasing, falling from 48.9% in Q1.
Less central areas in the west and south west such as Barnes, Balham and Brook Green are starting to mop up excess demand from the more traditional central areas. A shortage of supply coming on to the market in prime central areas like Chelsea, Kensington and Knightsbridge and demand from those who would have previously been buyers in traditional prime central locations but have been priced out or are seeking more space for their money is bolstering price growth across the wider prime market.
In the long-term, while the sheer lack of supply of quality property in the most central locations is likely to boost demand and prices in neighbouring areas, it will also ensure a healthy premium remains for addresses in the boroughs of Kensington & Chelsea and Westminster.
Lending activity in London
Prime central London and to a lesser extent its neighbouring markets has been insulated against the underlying weakness of the mortgage market, with 45.4% of prime buyers paying solely in cash in the second quarter compared to 39.9% a year ago. In prime central London, as a result of the higher proportion of international investors, cash only purchasers make up 59% of buyers.
A healthy mortgage market boosts transactional activity from the bottom up, as a vibrant first-time buyer market provides upwards momentum on property chains, boosting the number upsizing.
This is currently not the case. At a national level, gross lending is running at circa 40% of its pre-crunch level, and the lack of mortgage funding is hampering domestic buyer activity in parts of London and the wider national property market. Despite the boosted level of demand from first-time buyers seeking to beat the expiration of the stamp duty concession, there were 17,800 house purchase loans in Greater London in Q1 2012 1.7% fewer than in Q4 2011, and 56% of the level five years ago.
Much rests on the governments 100bn funding for a lending scheme announced last month, a move which should in theory make it easier and cheaper for banks to provide mortgage finance. If this means the constraints on first-time buyer borrowing eases, it would provide a new bottom-up impetus to activity in prime London, especially in areas in west and south west prime London, which attract lower levels of cash purchasers.
Supply & demand
Londons prime market continues to be characterised by a low level of supply, which is underpinning long-term price growth.
While the supply of properties on the market saw a seasonal 5.7% rise compared to Q1 2012, this was lower than the 10.4% increase over the same period last year. The seasonal uplift cannot mask the contraction on an annual basis, with the number of properties on the market falling by 19.8% compared to the same period a year ago.
Following the uncertainty in the eurozone, the volatility of the stock market, and the strong performance of residential property as an asset class, financially cautious prime London owners are holding onto homes and investment properties for longer, reducing the supply of homes coming onto the market. Demand cooled off slightly in the second quarter of the year as a combination of the Jubilee, tightening credit conditions and adverse weather contributed to the number of registered buyers falling by 3.7% on a quarterly basis. However, a strong cohort of those registered over the period moved with greater urgency, and many acted quickly to identify purchases and push through sales before the disruption of the Olympics. In turn, this urgency had a positive effect on prices achieved.
With supply falling faster than demand on an annual basis, the ratio of registered buyers to instructions stands at 17.5, compared to 15 a year ago.
Prime Londons current fundamentals of tightening supply against robust UK and international demand suggests the foundations are in place for continued long-term growth in property values, although we are likely to see annual growth steady after the rapid rises in the last year. As prices in prime central London climb further, a growing number of buyers will be encouraged into surrounding, less traditional prime areas, and the competition from wealthier buyers will buoy prices. Nevertheless, the shortterm picture may be odds with the long-term.
The Olympics will serve as fantastic publicity for London, and drive its global appeal to investors and international buyers but it is likely to put an artificial ceiling on buyer activity in the coming weeks, limiting the number of viewings that will take place especially in the busier parts of central London. While buyer activity is likely to bounce back in the aftermath of the Olympic period, it is also likely to feed into a fairly static quarter in terms of price growth.
The Prime Market Monitor uses a repeat valuation methodology that tracks values in a robust basket of properties across prime London in the areas in which Marsh & Parsons operates. Prime central London comprises representative baskets of properties covering Chelsea, Kensington, Notting Hill, Holland Park and Pimlico. Prime London comprises all areas in prime central London, and includes areas such as Clapham, Balham, Battersea, Barnes, Pimlico, Little Venice and Brook Green. Supply and demand statistics are based on an audit of Marsh & Parsons registrations and instructions during the quarter. Buyer profile information taken from Marsh & Parsons quarterly MI data. Lending data is taken from the latest CML statistics available.
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