_Knight Frank's prime UK market forecast

Oliver Knight, Associate, Residential Research  

Prime Country

Annual price growth across the prime country property market currently stands at 0.2% in the year to September 2017. Our expectation is that values will end the year relatively unchanged compared with 2016.

Higher rates of stamp duty continue to act as the biggest brake on price growth and activity, especially in more rural markets and those where discretionary buyers are more prevalent.

However, while there have been signs of an improvement in activity this year, falling stock levels at the top end of the market could weigh on sales volumes as the year progresses.

An analysis of listings data shows there were 8.2% fewer homes worth over £1 million advertised for sale across England and Wales at the end of August compared with the same period the in 2016. Above £2 million, the fall was slightly higher at 9.5%.

Performance is increasingly influenced by value, something which is expected to continue through 2018. Overall, we are forecasting price growth in prime markets across England and Wales of 1.5% in 2018 and of 2.0% in 2019.

Town and city markets, which have been the strongest performers over the last few years both in terms of price growth and activity, are expected to post some outperformance in the next year or so. The relative value now offered by more rural markets, however, could mean we start to see a reversal of this trend in some localities as the forecast period progresses.

Tom Bill, Head of London Residential Research

Prime London Sales

The sales market in prime central London (PCL) continues to move towards recovery mode as pricing adjusts to higher transaction costs and political uncertainty.

Average prices recorded a marginal rise of 0.1% in October, which took the annual fall to -3.6%. It was the most modest rate of decline in a year and suggests that price declines are bottoming out.

Supply and demand indicators also underpin this. While the number of new prospective buyers is rising, the level of new stock coming to the market declined over the course of 2017.

The same patterns are prevalent in prime outer London and inform our price forecast. The annual price decline of -1.4% in October was the most modest decrease recorded in 2017.

However, any recovery is not happening in a uniform manner. Instead, the market remains stratified and performance is linked to variables that include price bracket, the level of specification and amenity and the extent to which stamp duty rises have been priced in.

For example, properties worth £5 million-plus in PCL experienced a more rapid decline in pricing than sub-£5 million properties due to the effects of higher stamp duty in 2016. Pricing at this level is now recovering more quickly than the rest of the market, a trend we expect to continue into 2018.

Meanwhile, we expect sales volumes across prime London to remain below their historical rates in the near-term as stamp duty continues to have an impact on liquidity.

Uncertainty generated by Brexit will also continue to impact sentiment, although an orderly transition period could see some pent-up demand released from 2019, which would have a positive effect on pricing.

Prime London Lettings 

Rental values in prime central London fell 2.5% year-on-year in October, which was the most modest decline recorded since May 2016.

Rental value declines are bottoming out as the rate of new supply slows down - the result of fewer ‘accidental landlords’ coming to the market since the beginning of the year. In other words, fewer would-be vendors are opting to let their property as pricing and sales volumes stabilise in the sales market.

Two other factors indicate that this slowdown will continue  - underpinning our forecast that rental values will move from negative to broadly flat in the near-term in prime central and outer London. First, the large spike in new stock that followed the introduction of the additional rates of stamp duty in April 2016 has been largely absorbed by the market. Second, a series of tax changes affecting landlords will cause some to re-evaluate their portfolios and act as a brake on new supply.

Meanwhile, demand is likely to remain strong, particularly in the lowest and highest price brackets.