Volatile financial markets start to bite into property markets

Weaker financial markets are already leading to a cooling in the performance of the prime central London property market with annual growth levels under pressure for the first time in nearly two years, according to Savills research. Just 3.2% quarterly growth was recorded in the third quarter of the year, down from 9% in the first quarter.

Lucian Cook, Director Savills research, comments: “The tempering of growth is a direct reaction to uncertainty in the City with purchasers and potential purchasers expressing more caution pending a clearer picture of future job security and bonus expectations.

There have been some incidences where buyers, particularly those employed in the City, have withdrawn from the market in what is seen by Savills as a natural reaction to current uncertain circumstances. Even where deals have fallen through, pent up demand remains such that there is generally still a competitive (although less frenetic) bidding environment and other buyers have been coming forward.

We anticipate this increased caution to be a feature of the market for the remainder of 2007 and the first part of 2008, with minimal growth in values likely in the last quarter of this year. In light of this, we have decreased our base case scenario forecast in prime central London for this year from 22% to 18%. This assumes that there are limited redundancies in the City and that the current crisis of confidence in the financial markets is short-lived.

Cook again, “ Should the reduced confidence become deeper-rooted and redundancies more widespread, we would anticipate that there is a possibility of price falls in the final quarter and much lower growth next year. Any prediction of a house price crash is definitely unfounded at this stage as the fundamentals of the market are sound and no serious economic commentator is predicting the recessionary environment that would precipitate one. Despite continued supply/demand imbalances over the longer term, we do not believe that a return to the earlier extraordinary growth levels of this year is realistic.”

We have previously seen short lived slowdowns in the market as a reaction to specific events in either the political or financial environment. This occurred in both 1998 and 2001 and we currently expect to see a similar pattern emerging to these short-lived shocks.