London Prime Market Monitor - Q3 2012
Tue 30 Oct 2012
- Property price inflation slows to 3.5% in Q3 as supply eases slightly
- 43% of homes in the prime areas of London now worth 1m compared to 35% in 2011
- Sign of improvement in prime mortgage market as number of buyers with finance increases
Price growth starting to slow
Property values in prime London climbed in the third quarter of the year, but the rate of increase is slowing. In Q3 2012, prices rose by 3.5%, compared to a 3.7% rise in the previous quarter. The slowdown was even more pronounced in prime central London (PCL), with prices rising by 2.7%, compared to 3.5% in Q2 2012. This may indicate that the price growth in the capital is moving towards a steadier, more sustainable rate of increase. Despite the gentler price inflation in the short-term, homeowners in the prime areas of London have seen the value of their homes rise by an average of 11.1% annually, with properties in the sub 2m bracket, especially those priced between 400,000 and 1m, selling well.
Supply & demand
The improved supply of property contributed to slower price growth in the quarter. The number of properties hitting the market in the period increased by 2% compared to the previous quarter, although the current level remains 8.8% lower than a year ago. Demand slowed, as buyer registration figures fell by 14.8% in the quarter asthe distraction of the Olympics exaggerated the seasonally quieter months of August and July. During the quarter, the ratio of registered buyers per instruction dipped to 14.7 compared to 17.5 in the previous quarter. While the ratio has fallen as supply increased, the level of competition is strong enough to continue supporting long-term price growth, albeit at a less frenetic pace.
Buyer activity may have picked up in September, but the majority are not moving with a real sense of urgency. Many are educating themselves on the current market and stamp duty developments rather than acting with haste, and properties need to be almost perfect - as well as correctly priced - to entice speculative buyers into action.
International buyers are a crucial component of London's housing market, and in prime central areas of the capital, nearly half of all buyers (45%) are from overseas. But it's easy to overlook the role played by domestic buyers, especially outside of the most central areas of London. In the third quarter of 2012, 71% of all buyers in the prime areas of London were domestic buyers, a figure that rose from 69% in the previous quarter. On the whole, domestic buyer demand has held up well this year, and it is crucial that the government does not discourage their activity with further taxes. Despite the reduction in bonuses and concerns over weakening employment prospects in the City, the number of UK buyers exchanging rose by 13% in Q3 2012 compared to the previous quarter.
However, the latest ONS figures show that in the year to March, the total bonus pot for financial services and insurance employees was 9% down year on year. If this trend continues, and the traditionally bumper Christmas bonuses shrink further, we may see a reduction in the number of domestic cash buyers in the coming six months. This may be somewhat offset by tentative signs of an improving mortgage market for prime buyers. The number of buyers purchasing with mortgage finance in the three months to September rose by 21% compared to the previous quarter, pointing to a short-term improvement in mortgage availability. Banks and building societies are still primarily targeting the least risky borrowers with the largest deposits, but if the Funding for Lending scheme channels a significant proportion of cheaper funds towards the lower end of the market too, it's likely to boost upwards mobility on London's property ladder and free up property chains in coming months.
Price growth diluted throughout prime London
For the second successive quarter, the difference in price between the average property in prime central London and the outer prime areas has reduced, with prices in areas such as Barnes, Clapham and Fulham performing particularly strongly. On average, these less central prime areas saw prices rise 1.9% faster in the quarter than prices in more traditional and central locations.
The million pound question
Applying new wealth taxes on 1m or 2m properties has become an ongoing political battleground. Leaving aside the questionable rationale of adding yet another tax burden to the only part of the UK property market that is thriving, it's clear that any new wealth tax based on the 1m or 2m threshold would disproportionally impact prime London residents - effectively becoming an additional geographical tax.
Ownership of 1m homes in London is no longer limited to those with the largest incomes. In the last year, the proportion of properties in the prime areas of London worth more than 1m has risen from 34.6% to 43%. 1m homes are even more ubiquitous in prime central London, where 61.7% of homes are now worth more than 1m, up from 50.4% in September last year.
However, we are certainly seeing a ripple effect. Two years ago, 57.1% of 1m properties in prime London were located in traditional prime central locations such as Kensington, Chelsea and Westminster, a figure that has fallen to 52.7% as a result of the rapid price growth filtering into areas to the south and west, such as Fulham and Battersea.
The introduction of the 7% stamp duty tax on properties worth more than 2m in March has taken its toll on demand for properties priced between 2m and 2.3m, creating an artificial price ceiling at 2m. This, combined with slower price growth in the past quarter has slowed the increase in the number of properties climbing above the 2m mark in the quarter. Nevertheless, 18.5% of all homes in the prime areas of London are now worth 2m or more, compared to 14.3% a year ago. Prime central London has a much stronger concentration of such properties, with a third of properties (35.5%) in the traditional central prime areas with a value of 2m or more, up from 28.4% two years ago, as a result of the rapid average price growth in the two year period.
The Chancellor of the Exchequer has thankfully indicated that a 'Mansion Tax' is not going to come into effect, but it will be interesting to see whether he will compromise with his coalition partners in coming budgetary decisions. Any wealth tax based on the value of a property would be a move that penalises long-term homeownership, disproportionately hitting London. 1m and 2m homes are increasingly common in the capital, and no longer limited to the cash rich, and any property tax changes should recognise this.
The chasm between supply and demand closed slightly in the past quarter, but the number of available properties is still chronically low, and will underpin prime property values in the long-term. While international buyers will continue to buoy buyer demand, the rate of price growth will also be closely tied to the performance of London's economy and financial services sector, as well as the historically constrained lending conditions. Given the move away from a wealth tax, which should alleviate many prospective buyers' concerns on an even higher tax burden, we anticipate prices will continue to rise in the next twelve months, albeit at a steadier rate of around 5%.
The Prime Market Monitor uses a repeat valuation methodology that tracks values in a representative mix-adjusted 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, as well as areas such as Clapham, Fulham, Balham, Battersea, Barnes, Pimlico, Little Venice and Brook Green. Historic data has been revised since the previous edition following the expansion and improvement of the basket of properties.
Supply and demand statistics are based on an audit of Marsh & Parsons' registrations and instructions during the quarter. Buyer profiles information taken from Marsh & Parsons' quarterly MI data.
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