The high-end bounce continues in London

The bounce in prime central London values has continued in the third quarter of 2009, according to Savills Research. Their index of prime central London property prices rose by 4.0% between June and September this year, following a similar rise in the second quarter.

Stock levels are 20% to 30% lower than the medium-term average across all London’s prime markets, but demand has also increased.

Says Barnes, “This growth is caused by very low levels of supply failing to meet an increased level of pent-up demand, predominantly from cash buyers or those with very high levels of equity to spend.”

The prime central London market is cash-driven
“The effect of cash purchasers is particularly pronounced in the central prime markets (such as Mayfair, Chelsea, Kensington, Hampstead etc.) where, traditionally, there has always been a low reliance on mortgage borrowing. In this year to date, only a quarter of purchases in these Savills markets have involved borrowing.”

The prime south-west London growth phenomenon
In the more family-orientated, domestic markets of south-west London, there is much more reliance on borrowing, with around two-thirds of buyers using a mortgage. Nevertheless, the loan to value ratios in these prime markets are usually much lower than in mainstream markets and there is still a strong element of cash funding. Consequently, these markets have been showing the strongest growth of all the prime London markets this year as need-driven purchasers chase very limited stock.

Price growth in the prime residential markets of south-west London have reached a level of growth comparable to that seen at the height of the market in the first half of 2007 according to the Savills index. In the three months to the end of September, prime property prices in the belt running from Fulham to Richmond (and including Clapham and Wandsworth) rose by an average of 8.4%. Coming on top of growth of 6.4% in the previous quarter, this cancels out the falls see in the period following the collapse of Lehman brothers leaving prices 2.5% higher than the previous year.

“Although much has been made of the effect of a lack of supply in driving price growth this only tells part of the picture” say Lucian Cook, director of residential research at Savills. “Stock levels are 20% to 30% lower than the medium term average across London’s prime markets. But over the past three months in prime south-west London our key demand indicators (namely, applicants, viewings, deals agreed and exchanges) were well above the average for the period 2003 – 2007 when sustained growth was recorded.

“Central London is traditionally seen as the leading prime market indicator but the fundamentals of demand essential to market stability, and ultimately growth, are now much stronger in prime south-west markets, reflecting the different nature of these locations.”

Whereas the prime central London residential market is dominated by activity in the £1m to £4m bracket, in the prime markets of south-west London activity is centred in the £500,000 to £2m bracket. Says Cook, “Here demand is less dependent on those international ultra high net worth individuals who are still in a process of rebuilding their wealth. In south-west London 85% of buyers of prime property are UK nationals, much more likely to be acquiring a property for use as their main residence than as a second home.”

Because values in south-west London fell more dramatically in the downturn than in other prime markets (by the end of the first quarter of 2009 they had fallen some 25.8% from peak), they more obviously became good value to a wider range of buyers driven by domestic need rather than discretionary or investment-related reasons.

“These buyers had withdrawn from the market throughout the period of the downturn, in some cases moving into rented accommodation, but as soon as the risk of job loss was seen to recede and further economic shocks did not materialise, their caution transformed into action.

“There was a release of pent up demand which gathered momentum through the summer. Against the context of finite stock, price rises became inevitable. Importantly, this market has simultaneously become less reliant on demand from the financial and business services sector”, says Cook. “Buyers from this employment sector accounted for 52% of the market in 2008 but only 45% in 2009.”

Looking forward:
With more stock likely to come to the market as the potential sellers seek to tap into the strongest market conditions for two years, the imbalance between supply and demand which has driven this price growth will ease. This is anticipated to take some of the pressure off prices.

“Depending on shifts in underlying economic conditions, prices are expected at best to level out again and may fall back somewhat”, says Barnes. “However, we expect the south-west and central London markets to continue to perform differently to each other. Demand levels will probably prove more volatile in the central markets due to the discretionary nature of buyers. Meanwhile, steady, family needs-driven demand in the south-west should prove more stable, though slightly more vulnerable to affordability issues, and more exposed to interest rate rises. Having said this, it is clear that all prime markets will continue to be equity-driven and less prone to the problems of mortgage lending than the mainstream UK markets.”

For more information, visit savills.com.