Research article

When the fog clears


An uncertain global and domestic political climate has led us to push out the recovery in the prime central London market by a further 12 months

The unknowns of today look (unfortunately) like the unknowns of 12 months ago. And therein lies the problem. Last year, we concluded it was unlikely that the stellar house price growth of the past would be sustained during a period of rising interest rates, increasing returns on other assets, the unwinding of quantitative easing and greater taxation.

However, we did forecast price growth at above the rate of inflation. This was on the basis that London would maintain its world city status and its underlying appeal to a growing pool of global wealth.

The unknowns, then and now, relate to when London will look like identifiably good value and when the current fog of political and economic uncertainty will clear.

Brexit has not changed the fundamental reasons why people invest in London

Savills Research

The current view

Our forecasts continue to reflect all of these principles. Global wealth creation remains strong; the pool of global ultra-wealthy individuals is expected to increase by 40% over the next five years and Brexit has not changed the fundamental reasons why people invest in London. Office take-up suggests London remains attractive to a range of wealth-generating businesses.

The tax environment remains less appealing than it was five years ago. Indeed, those hoping for a stamp duty cut at the top end of the market have instead seen proposals for a further surcharge on overseas buyers. However with similar, often more draconian, measures in a number of competing markets, the tax regime for prime London property remains competitive with other world cities (see 'The bigger picture').

Quantitative easing has now started to unwind and global interest rates have begun to rise. Increasing returns from other asset classes, particularly safe-haven investments such as gilts and bonds, are expected to continue and compete with the prime central London market for investment.

However, this is only part of the story. Those buying the most expensive homes in central London are often driven by the appeal of owning a piece of prime real estate as a trophy asset and so are less concerned about rental yield and total return.

But 2018 hasn’t quite panned out as we thought, and price falls have continued for longer than we expected.

At the end of the third quarter of the year, the rate of price falls were slowing and transaction levels appeared to have stabilised. But this is not enough to suggest the market will return to growth in the short term. Sentiment is likely to take a dip in the last quarter of 2018 in the wake of the announcement of more taxation for overseas buyers. Added to which, perceptions of political uncertainty remain high, restricting the market’s capacity for a bounce-back in values.

More specifically, the expected timings of Brexit have been pushed out. Last year, we predicted that Brexit uncertainty would rumble on, but assumed we could all breathe a sigh of relief as negotiations concluded in 2019.

Following the lack of progress with negotiations, and the resignation of high-ranking ministers in protest at the Government’s preferred negotiation position, it appears Brexit and the accompanying domestic political uncertainty will continue to hang over the market.

That has caused us to delay the expected recovery in the market by a further year. But this comes with a caveat. There is an unusually wide range of potential scenarios around Brexit, domestic politics, fiscal policy and comparative returns. Each is able to impact on the extent and timing of any recovery, as we explore below.

Recovery rate How the key factors could influence a return to growth

Recovery rate

Our forecasts use the following assumptions

The general election in 2022 is close run, assuming the main political parties maintain the same broad policy agendas currently adopted. A Conservative minority government remains throughout the forecast period to 2023. The London economy grows by 11% over the period of the forecast. Employment in the financial and insurance sectors is retained at circa 350,000 over the forecast period and job losses are contained to no more than 20,000. Bank base rates increase to 2.6% by the end of the forecast period. The UK’s trading relationship with the EU remains largely as it is today. The only changes to stamp duty are the introduction of an overseas buyers levy at no more than 3%.

Prime central London forecast

Definition of prime This market consists of the most desirable and aspirational property by location, aesthetics, standards of accommodation and value. Typically, it comprises properties in the top 5% of the market by house price.

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