The optimism surrounding the recent release of UK activity indicators, alongside a continuation of stable credit conditions, is having a marked effect on the housing market.
Helped by the recent implementation of the government's Help to Buy scheme the Nationwide House Price Index rose by 4.3% - significantly up from a contraction of 1.6% in the same quarter the previous year.
There still remain questions over the near-term outlook for the national housing market. Change at the top of the Bank of England has caused uncertainty over direction of monetary policy. Moreover productivity and wage growth are continuing to fail in matching the increase of output and employment in UK sector activity. However, the risks appear more subdued and consequently we have upwardly revised our forecast for UK house price growth in 2013 to 4.5%.
Prime London market
Prime London residential prices in Q3 built on the previous growth in Q2 and transaction levels are at their highest since 2006. There does appear to be a disconnect between the very top end (£10m and above) and the remainder of the market with the former being slowed by both by tax changes and perhaps the head of steam coming off the extraordinary levels of activity seen in 2010 to 2011.
It is important to point out that, regardless of the performance of the rest of the UK's housing market, prime London - and especially the prime central London sector - continues to be very different to the rest of the country. Prices in the rest of the UK are mainly driven by economic performance and the cost and availability of mortgages.
To a certain extent this is less true in central London. Instead the prime central London market is largely driven by international investors looking for a safe haven asset with London's properties ranking highly on their investment list.
Strutt & Parker's data for the period October 2012 to September 2013 show that 44% of all buyers in prime central London are foreign (considerably higher in some submarkets like Knightsbridge), which is reflected in the high proportion of cash purchases in that market as foreign buyers rarely resort to mortgages to fund their purchase - at least in the initial purchasing stage.
Looking ahead, the outlook for the prime London and prime central London markets will therefore be impacted by the performance of the global economy, the stance of politicians around the world on global residential investment and the sterling exchange rate.
UK assets are likely to remain attractive to foreign investors as downward pressure on the currency persists although this attractiveness is predicated on buyers believing the currency has bottomed out and/or will be returning to long-term norms by the time they wish to sell.
Another factor that is likely to play a part is the pace of recovery in the UK particularly in the key financial services industry in London. Despite uncertainty over new European rules on bonuses and dramatic changes in the regulatory framework itself just round the corner the latest release of UK service sector data suggests the recovery is gaining momentum.
Financial services employment has seen strong growth in September and this is expected to continue into the end of the year. London is also leading the UK-wide growth in the business services sector. A significant improvement in domestic business and consumer confidence is cited as driving the recovery in business services output and employment figures. This trend will continue through the latter stages of the year.
Whilst the economic fundamentals would therefore suggest that prices may continue to rise at the same rates over the next few years the biggest perceived uncertainty surrounding the prime London markets over 2014 to 2015 is the looming election.
There is likely to be considerable uncertainty for buyers and sellers particularly around the £2m price bracket due to the potential change of government and associated possibility of a Mansion Tax. We expect that price growth in 2014 will be very sensitive to prevailing political press and expectations and that 2015 may remain quite flat for the same reason although we expect that sustainable growth will return from 2016 onwards.
Conclusion
Overall we expect prime central London house prices to grow by around 6% in 2013 but to perform less well over the next two years as considerable uncertainty returns.
Volterra, the economic consultancy, forecasts 3.5% and 0% for 2014 and 2015 respectively in the central scenario. This is a stark contrast to 2010 and 2011 when prime central London prices surged by over 13% year-on-year. However most of the risk around these forecasts is on the upside as markets may not react as nervously as expected to the potential for Mansion Tax and it may be that transactions decrease but values hold better than expected.
On the supply side measures taken by the government to breathe life into the ailing housing market are undoubtedly boosting house building and increasing demand. While much of this activity is in the sub £600,000 segment of the market prices up to £1m could also see some spill-over over the coming months through a ripple impact. However it is uncertain how much upward pressure this will exert on price growth.
2013 has seen the markets pick up across much of the UK and in London specifically latent demand from 2012 has surged through over the summer period. The residential market is so sensitive to uncertainty and political change that our bearish medium-term view has significant potential upside both in London and across the UK should confidence be maintained.
