Residential property forecasts - Pulling in di erent directions Our fi ve-year forecasts examine the divergence in future house - Savills
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UK Residential – Autumn 2018
REPORT Residential
Savills Research
property forecasts
Pulling in different directions
Our five-year forecasts examine the divergence in future house
price performance between London and the regions
Foreword
Where science meets art Contents
Five-year forecasts
and market analysis
4-7 UK forecasts
We highlight the
main drivers behind
UK mainstream price
If I were to bet my life savings on in an age of mortgage regulation. movements. Plus, our
the piece of Savills research that will Our assumption, which is aligned five-year forecasts for
get more reaction than any other, with the central scenario of the the UK and its regions.
I would stake it on this – our annual Bank of England, is that these will
Residential Property Forecasts. increase gradually to support total 8-9 Region by region
To arrive at our final figures, we house price growth of 14.8% at a As prices struggle
use large sets of data and economic national level over the next five in London, higher
modelling to unlock future trends. years. As we argue on p4, that income yields and
But this work involves a degree of would put a squeeze on the level fewer constraints on
conjecture, too. of mortgage that borrowers are mortgage affordability
Our short-term forecasts rely offered relative to their salary, as are driving performance
on us accurately predicting what mandatory stress tests become in the Midlands as well
will happen to sentiment. We have more difficult to meet. as in the North.
some lead indicators of supply We expect this to act as a drag
and demand to help with this. But on house price growth, especially 10-11 Transactions
Transactions may have
2018 has not been a normal year, in London and the commuter belt
hit a plateau, but the
and these indicators are arguably where the growth in house prices
trends in buyer types,
more fickle than ever. from 2005 to 2016 has left less
and what they’re buying,
room for movement.
is far from static.
Extreme scenarios
Take, for example, the reporting More than just house prices 12-13 Build to rent
of the Bank of England’s extreme, However, this report is not just Demand for privately
almost apocalyptic, scenario of about house prices. It is also about rented homes is set to
35% house price falls in the event trends in buyer types and where rise. Is build to rent the
of a hard Brexit and spiralling they are buying. We also examine answer to the mismatch
interest rates. We believe this is housing delivery, and just how the in supply and demand?
highly unlikely. A correction of this government sets about fixing our
nature is without precedent and ‘broken’ housing market – a key 14-15 Development
the economic conditions required plank of domestic policy. To reach government
are at the margin of a wide range This report may not come with targets, housebuilders
of potential outcomes, as Mark a cover-mounted comfort blanket must diversify their
Carney pointed out after the of absolute certainty. And you will products, tenures and
headline writers had made mischief. have your own views about our delivery models.
That said, sentiment is exposed conclusions. But forecasting is as
to how Brexit negotiations proceed much of an art as it is a science – 16-18 Prime markets
We look at the factors
and, specifically, the perception and looking into the future remains
shaping the UK’s prime
of what the outcome will mean for a vital part of what we do.
markets, as well as the
household finances.
prospects for growth.
While this all remains unclear, do
not expect any great movement in
19 Contacts
house prices or market activity at
a national level.
Our longer-term outlook for the
housing market is more dependent
Lucian Cook
on what will actually happen to
Head of
household finances. Assumptions Residential Research
about earnings growth and interest 020 7016 3837
rates are critical to this, especially lcook@savills.com
3
UK forecasts UK forecasts
Unfamiliar
territory
At this point in the property cycle,
growth in London typically slows as
price rises ripple out to the regions.
This time, the divergence appears even
more marked. With Brexit uncertainty
in the short term, a general election on
the horizon and rising interest rates,
stretched affordability will limit growth
in London and the South. Conversely,
we expect growth in the North West
and Yorkshire to be over 20% by 2023
Words Lawrence Bowles
4 5
UK forecasts UK forecasts
14.8%
Five-year compound
growth forecast
for UK residential
market
to be a problem for those households where buyers are already operating That adds to the regional dimension
already paying their mortgage. But, on higher loan-to-income ratios of our property forecasts. So, in
assuming it remains unchanged, than elsewhere in the UK. revisiting them, we have looked again
a 3% affordability stress test for new In combination with restricted at where we are in the cycle and
buyers will start to impinge on the tax relief, this will also continue to concluded that the divergence in
amount people can borrow relative hit mortgaged buy to let investors. performance across the country is
to their earnings. Already, these investors have become likely to be greater than we have
In turn, the rate of house price much less active in the market, previously predicted.
growth will be constrained. This is especially where high house prices You can see how that divergence
likely to have a much greater impact and low yields make it more difficult works region by region below, and
in London and the South East, for them to make the sums add up. read more over the page.
What’s behind the 14.8%? UK house price forecast and key assumptions 5-year Mainstream five-year forecast There is a significant divergence in performance across the country 5-year
compound compound
2019 2020 2021 2022 2023 growth 2019 2020 2021 2022 2023 growth
UK house price forecast 14.8% North West 21.6%
1.5% 4.0% 3.0% 2.5% 3.0% 3.0% 6.0% 4.0% 3.0% 4.0%
Household income growth 2.0% 2.9% 3.4% 3.5% 3.5% 16.1% Yorkshire & Humberside 20.5%
2.5% 5.5% 4.0% 3.0% 4.0%
Base rate 1.0% 1.5% 1.8% 2.3% 2.8% n/a Wales 19.3%
2.0% 5.5% 4.0% 3.0% 3.5%
Source Savills Research, Oxford Economics
East Midlands 19.3%
Two new housing ministers. Two Last year, we based our forecasts Affordability issues
3.0% 5.0% 3.5% 3.0% 3.5%
Bank of England base rate hikes. on the assumption that the UK For now, affordability, measured by
Continued disagreement on what would begin a transition agreement mortgage payments as a percentage
flavour of Brexit the public voted with the EU in March 2019, followed of income, remains pretty benign. West Midlands 19.3%
for back in 2016. A lot has changed by a free-trade agreement. The base rate is still only 0.75% –
since our property forecasts from The progress that is made in Brexit far lower than at any point in the
3.0% 5.0% 3.5% 3.0% 3.5%
a year ago. negotiations, both in the run up to 20 years before the global financial
Although we have become March next year and what happens crisis. According to the Bank of 18.2%
Scotland
accustomed to a merry-go-round afterwards, will be key to sentiment England, the average interest rate
of ministers responsible for housing, among buyers. for a two-year fi xed mortgage in
2.5% 5.0% 3.5% 2.5% 3.5%
the likely trajectory of interest rates The sooner a deal is struck, the September was still only 1.7%.
and underlying Brexit uncertainty more certainty it will bring to the The base rate hike in August was 17.6%
North East
have been at the heart of a slowing market. The more prolonged this more about putting buyers on notice
in levels of UK annual house price period of uncertainty, the greater of what may occur in the future. 2.0% 5.0% 3.5% 2.5% 3.5%
growth. At the end of September, the chance that current market The expectation is that base rates
Nationwide put it at 2%. malaise will spread beyond London will rise gradually. This will put South West 12.6%
The main impact of these factors and the South East. This would a squeeze on the amount people
0.5% 3.5% 2.5% 2.5% 3.0%
has been to weaken confidence. slow house price growth more can borrow, particularly as
Indeed, the RICS housing market widely, at least until we get a mortgaged buyers factor in the
survey has given a positive reading clearer picture on the economic additional cost of the capital South East 9.3%
for new buyer enquiries in only implications of leaving the EU. repayments that have now become
two of the past 18 months. More particularly, a lot depends the norm. This is likely to amplify 0.0% 2.0% 2.5% 2.0% 2.5%
on what Brexit means for interest the effects of the stricter 2014
Sentiment running low rates and income growth. mortgage regulations over the East of England 9.3%
In the short term, sentiment will There is some interplay between second half of our five-year
remain the primary driver of house the two. Assuming that – as most forecasting period.
0.0% 2.0% 2.5% 2.0% 2.5%
price movements. The economic economic forecasters are suggesting From 2021, we expect the Bank
implications of Brexit, and what this – we avoid a full-blown recession, of England base rate to rise from London 4.5%
might mean for household finances, then interest rates are probably 1.5% to 2.75% by the end of our
-2.0% 0.0% 2.5% 1.5% 2.5%
lies at the heart of this. the bigger of the two variables. forecast period. This is unlikely
Source Savills Research Note These forecasts apply to average prices in the secondhand market. New build values may not move at the same rate
6 7
Regional forecasts Regional forecasts
Parting of
the ways
At this point in the prices keep on growing, Just as importantly,
cycle, we would expect albeit at a slower pace. the experience of the
to see house price Over the next five years past year tells us that
inflation in London we expect growth in those markets that
underperforming the London to be much traditionally perform Scotland
UK average, as growth lower than at equivalent best in the second We expect Scotland to perform
ripples away to the points in previous half of a housing cycle ahead of the UK average, growing
Midlands and North. cycles as interest can continue to grow, 18.2% over the next five years.
Historically, when rates rise and the even if the London Much like the rest of the UK,
this happens, London market rebalances. market is muted. growth will be tempered by
political uncertainty with Brexit Wales
The North negotiations in 2019, a UK general Wales is a hugely diverse housing
With house prices in the North election in 2022, and the additional market, ranging from the higher-
only recently returning to pre- factor of Scottish elections in 2021. value urban markets around Cardiff
credit crunch levels, there is more Yet, Scotland still has room for and Swansea to rural and coastal
capacity for both household growth, particularly in popular, communities across Pembrokeshire
fi nances and mortgage lenders well-connected neighbourhoods. and Gwynedd.
to support more growth over In many of these markets, supply Historically, house price growth
the next five years than in other falls well short of demand, so in Wales has been stronger at this
regions across the UK. competition will drive up values. point in the cycle, so we expect it
This would fit the pattern of to perform in line with the Midlands.
previous cycles. Smaller deposits However, there may be room for
for first-time buyers and lower some local markets to perform
home-mover loan-to-income better. Most notably, there may be
ratios compared with most of the increased housing demand from
rest of the UK are expected to Bristol spilling over the Severn,
The Midlands underpin demand in the owner- once the bridge tolls are removed.
In 2018, the Midlands has been the occupier market. Meanwhile, we
UK’s strongest-performing housing expect the ability to achieve higher
London region. With fewer constraints on income yields in the northern
In the short term, London’s global mortgage affordability than in cities to underpin investment
city status leaves it more exposed areas further south, these markets demand from both institutional
to Brexit uncertainty, holding back The South have been able to better weather and private investors.
confidence in the market. On top of Though markets across the rest of Brexit uncertainty. Sitting beyond
that, house price-to-income ratios the South of England remain less the commuter zone, they have
in London’s mainstream housing constrained by affordability than also been less exposed to the
market are stretched to such an in the capital, they are likely to be slowdown in London. We expect the ability to achieve higher
extent that even the small rises in held back by less housing wealth Despite the prospect of higher income yields in the northern cities to
interest rates we expect by 2021 fl owing into the commuter zone, interest rates, there is capacity for
underpin investment demand
will have a constraining impact and mortgage constraints in growth in the loan-to-income ratios
on prospective buyers’ budgets. higher-value areas. offered to mortgaged buyers in the
Increasingly, price growth in the Price growth across much of Midlands. Together with earnings
capital will be dependent on an the South is therefore likely to be growth, this has the potential to
area unlocking its latent potential, dependent on earnings growth drive further house-price growth
either through regeneration or in the face of increasing interest over the next five years.
infrastructure improvements. rates. Lower-value markets may
benefit from demand from budget-
conscious buyers looking to
stretch their buying power further.
8 9
Transactions Transactions
Growth of 52% The retirement housing
first-time sector offers vast potential
buyer to attract discretionary
numbers 3% cash buyers in the future
Last five years Last 12 months -3%
Next 5 years
Five key
sufficient mortgage debt to finance on mortgage-interest tax relief component of investment demand,
their move. are likely to result in even greater with a strong competitive advantage
We see no reason for these trends pressure on this part of the market. over those needing a mortgage.
to change significantly in light of our We expect these transactions to With downsizers also adding to
changes in
house-price forecasts. Therefore, we fall to around 50,000 by 2022, as their number, these purchasers are
expect the number of homemovers those who remain in the market often discretionary buyers. Some will
to be largely static over the course are required to supplement mortgage wait until the political uncertainty
of the five-year forecast period. debt with more equity of their own. of the next few years is resolved
buyer trends
In the longer term, as with first- before they commit to buying.
time buyers, homeowners’ ability
to trade up will increasingly depend
on either a change in their personal
5 Cash remains king
Cash buyers currently account
for about 31% of the market. Though
So, we expect their levels to dip
before bouncing after the general
election. In the longer term, their
finances or an injection of equity that figure has fallen a little since activity will be influenced by the
from older generations. 2014, these buyers still represent development of the retirement
Housing transactions have hit a plateau, with little a much bigger proportion of the housing sector – which remains
prospect of recovering to anything close to 2007 levels.
However, these headline figures mask shifting trends 4 Mortgaged buy to let
under pressure
The mortgaged buy to let market
market than was the case before
the credit crunch.
Given evidence of the number of
one of the biggest opportunities
still untapped in UK housing.
about buyer types and where they’re buying faces significant challenges. These purchasers who are bearing the 3%
purchases have fallen by 43% in stamp duty surcharge, these buyers
the past two years, with evidence are now a particularly important
Words Ed Hampson
that highly geared investors are
rationalising their portfolios
and refocusing on lower-value,
1 The regional picture
London and, to a lesser degree,
the rest of the South, have continued
Though take-up of Help to Buy
has grown by an average of 22% per
annum over the past three years,
in Q3 2014, they have fallen by 15%.
In the capital, loan-to-income ratios
simply haven’t been able to keep pace
higher-yielding locations.
The stamp duty hit of 2016
continues to depress appetite
Highly geared buy to let investors are
rationalising their portfolios and refocusing
to push up against mortgaged that’s not the only contributing with price growth, leaving barriers in the market, while restrictions on lower-value, higher-yielding locations
constraints at a time of fragile factor to this trend. to home ownership undiminished.
buyer sentiment. Across London, The ‘bank of Mum and Dad’ has By contrast, in the South East,
transaction numbers in the year to had a much greater impact. That’s transaction levels have risen by 15%
June 2018 were 6.2% lower than the not going to change any time soon, in the same period, fuelled, in part, Transactions per buyer type The mortgaged buy to let sector faces significant challenges
year before and stood at only half either, as any expansion of Help to by a migration of buyers into areas
2007 2018 2019 2020 2021 2022 2023 Change
of 2007 levels. Buy beyond 2021 is currently of greater affordability.
five years
Growth has continued elsewhere in expected to be for a limited period to 2023
the country, especially in areas where
affordability is less constrained and
buyer confidence is higher.
and in a more targeted form.
Looking into the future, loan-to-
income limits are also likely to act as
3 Existing owners staying
put for longer
The number of home movers has
Mortgaged
first-time 359,000 370,000 380,000 380,000 370,000 360,000 360,000 -3%
buyer
a barrier to expansion. The average been largely flat since 2014. Owners
2
Mortgaged
A first time for everything currently stands at a ratio of 1:3.69, now trade up the housing ladder
Shifting patterns of different having grown steadily since 2009, far less often. Our research earlier
home mover 653,000 370,000 370,000 370,000 370,000 370,000 370,000 0%
buyer types also reveal more about with more joint-income households this year found the average period
Mortgaged
how the market is now operating. taking mortgages at higher loan-to- between moves grew from nine
Contrary to what we are sometimes income ratios. As banks become less years in 2007 to 13.5 years in 2017.
buy to let 183,280 65,000 65,000 60,000 55,000 50,000 50,000 -23%
asked to believe, the number of willing to lend at ratios over four, With tighter mortgage regulation,
first-time buyer transactions has there is only limited room for first- homeowners in lower-growth Cash buyers
rocketed in the past five years. time buyers to stretch themselves parts of the UK have struggled to 422,000 370,000 360,000 350,000 380,000 360,000 380,000 3%
In the year to July 2018, they as interest rates rise. accumulate enough equity to trade
stood at 364,800 – some 52% higher This is especially true in London, up the ladder. And where house Total
than five years ago and up by 3% where first-time buyer transactions prices have grown fastest, 1,618,880 1,175,000 1,175,000 1,160,000 1,175,000 1,140,000 1,160,000 -1%
in just one year. have already declined. After peaking households struggle to raise
Source Savills Research
10 11
Rental Rental
72,000
We forecast the build to The number of buy to
rent pipeline will more let mortgages redeemed
than double to 300,000 since the start of 2017
homes by 2021
London stretched, weaker growth the rental market and increase the YIELDS: REGIONAL
is likely in the short term. supply of rented properties in areas TRENDS REVERSE
However, tightening access to of high demand. Yields, annual gross
mortgage finance, changing lifestyles BTR is already gaining momentum, rent as a proportion of
and demographics is driving demand making up 8.7% of new housing starts the house price, have
for privately rented homes at all price in 2016/17. However, while BTR is historically been lowest
points. That mismatch in supply and gathering pace, it isn’t yet delivering in London and the South.
demand has attracted a new kind of enough homes to counter the flight Since 2013, yields have
investor to the market. of buy to let investors. From Q1 2017 decreased across the
to Q2 2018, there were just under country, but have fallen
Boom time for BTR? 10,000 build to rent completions. fastest in London, where
Changes to tax relief on buy to let In the same period, 72,000 buy to let the mismatch between
mortgage interest payments have landlords redeemed their mortgages. rental and house price
made many private investors take Until the supply of BTR properties growth was greatest. By
a second look at their portfolios. increases dramatically, we will contrast, yields in the
With less tax relief and rising remain reliant on cash investors Midlands and the North
interest rates, many have chosen to bring more stock into the rental have fallen much less.
to consolidate or leave the sector. market. As a result, we’re likely Our forecasts show
Depending on how policy evolves to see demand grow faster than these yields converging.
on longer-term tenancies and rent supply over the next five years, We predict that as rents
regulations, the pace of flight driving rental value growth. grow faster than house
may accelerate further. prices in the affordability-
While putting pressure on buy constrained South, yields
to let, the Government has shown will rise. In the Midlands
growing support for the institutional and North, where house
build to rent sector (BTR). price growth will outpace
Merano, Albert
Purpose-built rental blocks that are rental values, we expect
Embankment,
London
managed by professional landlords to see yields sharpen
could help raise standards across and move closer to
those in the South.
Things can only get BTR Tightening access to mortgage finance and
changing demographics is driving demand
With signs of a recovery in the rental market and stronger demand for for privately rented homes at all price points
rented homes, could build to rent (BTR) fill the gap left by buy to let?
Five-year forecast Rental growth is set to bounce back most strongly in London 5-year
Words Nicholas Gibson compound
2018 2019 2020 2021 2022 2023 growth
Historically, rents have moved in Build to rent New properties as of September 2018
line with household earnings. After
Key London Regions UK 13.7%
all, landlords can only charge what
tenants are able to pay.
0.5% 1.0% 2.0% 3.0% 3.5% 3.5%
So, with weak earnings growth 70,000
since the end of 2016, the sluggish UK exc. London 11.5%
rental growth of the last two years 60,000
Number of BTR homes
should come as no surprise. Earnings 1.5% 1.5% 2.0% 2.5% 2.5% 2.5%
fell in real terms in 2017 and 2018, 50,000
as inflation ran above the Bank of London 15.9%
England’s target of 2%. 40,000
-0.5% 0.5% 1.5% 4.0% 4.5% 4.5%
In the past, rental growth in
London has been able to outperform 30,000
earnings, as renters formed larger Earnings 16.1%
households with friends to split their 20,000
rental bill. This trend seems to have
1.7% 2.0% 2.9% 3.4% 3.5% 3.5%
reached its limit. London rents are 10,000
now seeing a slowdown, with rents CPI 9.1%
falling by 0.3% in the year to August 0
Complete Construction Planning
2.5% 2.0% 1.6% 1.7% 1.9% 1.9%
2018. With rental affordability in
Source Savills Research, BPF Source Savills Research, Oxford Economics
12 13Development Development
New
£7 billion
Grant funding required to
meet sub-market housing
need in England of 100,000
homes per year
balance With Help to Buy unlikely to last forever, housebuilding 3. Identifying the capacity to expand
must diversify to meet demand. We examine how wider
The expansion in housebuilding over 50 largest housing associations plan authority completions currently
choice can be met, and who has the capacity to deliver the past five years has been driven to build 43% more homes in 2020/21 stand at just 2,000 per year. But
mainly by the major housebuilders. than they did in 2016/17, reaching the relaxation of borrowing rules
Words Emily Williams Output by housebuilders has risen 50,000 completions. The increased provides an extra £10-£15 billion
74% since 2013, and developers who scale of funding available to these of funding that will create capacity
deliver more than 500 homes a year organisations via partnerships with for an extra 15,000 homes across
1. The legacy of Help to Buy now account for 77% of all new home Homes England will also help the England each year.
starts in England registered with the sector meet demand for alternative For many local authorities,
Despite a 74% increase in delivery in It is questionable just how much current end date in 2021. The equity National House Building Council. tenures, such as sub-market housing. the main obstacle will be building
the past five years, the development further this relationship can be loan has helped fund more than However, we anticipate the strongest The recent removal of the HRA up their construction capacity.
industry remains under pressure to pushed, particularly with doubts over 160,000 purchases in England since rate of growth in output over the cap on borrowing will also allow Collaboration with the private
build more homes. Currently, annual the scheme’s future after 2021. In a its launch in 2013. Nationally, Help to next five years is likely to come from local authorities to expand their sector will be essential to fully
delivery is 217,000 homes, yet in the market characterised by a lower level Buy has supported 44% of new build smaller housebuilders, housing development programmes. Local unlock this potential.
2017 autumn budget, the Government of transactions, it will also be hard to transactions in 2017/18, but its use associations and local authorities.
stated its ambition for housebuilding increase output if the focus remains has varied across locations, so the Small and medium housebuilders
to reach 300,000 homes per year. on homes for open-market sale. impact of a change or withdrawal have struggled since the global
To achieve this, the development As affordability becomes stretched of the scheme will be mixed. financial crisis, but with increasing The strongest growth in output over the next five
industry has to go beyond existing and fewer households can buy or Whether the scheme stops after government support, particularly via years is likely to come from smaller housebuilders,
delivery models. trade up, there is limited capacity 2021, or continues in a more targeted the Home Building Fund, they should housing associations and local authorities
Help to Buy is underpinning for new housing stock to be absorbed form, the key for developers is to find access to finance to be less of an
current delivery. During 2017, new by the for-sale market. Instead, have clarity as soon as possible, obstacle. The Letwin Review has also
build sales represented 13.5% of all development needs to reflect the so they can develop appropriate called for more opportunities for
transactions. In the decade before market’s increasingly diverse needs. strategies for sites that are coming smaller developers to partner with
the scheme launched, new build through the planning pipeline. large housebuilders on sites, to
sales averaged 11% of all transactions, The future for Help to Buy The ability to deliver a diverse deliver more diverse product.
but Help to Buy has pushed and The main unresolved question for product including multiple tenures Currently, housing associations
maintained new homes sales in the development industry will be the is likely to be the best way to soften build 17% of new homes, and have
a slowing sales market. form Help to Buy takes after its the impact of any policy changes. ambitions to increase output. The
New homes starts More than 70% are by developers with output of 500+ homes per annum
2. Diversifying to meet need Key 1-100 units 101-500 units 500+ units
100%
Over the past year, the Letwin the delivery of private rented homes respect and, if it is done properly,
Review has been investigating ways alongside those for market sale could it should be able to deliver more
to increase build-out rates. It also accelerate absorption rates and – affordable housing.
Proportion of new home starts
concluded that diversity of housing with them – build-out rates. But the Review does acknowledge 80%
is a barrier to high build-out rates, We estimate that additional build that – under the current models
registered with NHBC
in terms of size and specification. to rent completions will total 7,000 of delivery – the rate of completion
Pricing also needs to compete this year, with the potential to rise to of affordable housing is limited by 60%
with the local secondhand market. 15,000 a year by 2021. This expansion the need for cross subsidy from
Sir Oliver Letwin has suggested includes more sites in suburban open-market sales on the rest of the
that to increase build-out rates, there areas with access to employment site. We have previously estimated 40%
needs to be more diversity of tenure and those demographic groups who sub-market housing need in England
to tap into demand in other parts look to rent. at 100,000 homes per year, which
of the market. He has concluded The final recommendations of the would require at least £7 billion of 20%
that the demand for affordable Letwin Review are now imminent. grant funding per year. This is well
housing – particularly social rent A key question will be just how an above the £9 billion total allocated
– is ‘virtually unlimited’. expansion of affordable housing can for the whole of 2016-2021. 0%
Similarly, Sir Oliver has identified be funded. The Government’s new
2010
2013
2014
2015
2016
2017
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2011
2012
that the demand for private rented National Planning Policy Framework
accommodation is a different market is designed to encourage realistically Source NHBC
from open-market sale. Therefore, ambitious setting of policy in this
14 15Prime markets Prime markets
Holden Road,
Tunbridge
Prime five-year forecast The value offered in regional prime markets will underpin growth
Wells, Kent
2019 2020 2021 2022 2023 5-year
Prime central London 12.4%
-1.0% 0.0% 6.0% 2.0% 5.0%
Other London 7.1%
-1.0% 0.0% 3.5% 1.0% 3.5%
Suburban 8.2%
-1.0% 0.0% 3.5% 1.5% 4.0%
Inner commute 9.3%
0.0% 0.0% 3.0% 2.0% 4.0%
Outer commute 10.9%
0.0% 0.0% 3.0% 3.0% 4.5%
Wider South 14.8%
1.0% 2.0% 3.0% 3.5% 4.5%
Midlands/North 15.3%
2.0% 2.0% 3.0% 3.5% 4.0%
Scotland 14.2%
2.0% 2.0% 3.0% 3.0% 3.5%
Source Savills Research Note These forecasts apply to average prices in the
secondhand market. New build values may not move at the same rate
Prime: the roadmap to recovery
And the markets beyond London?
Hermitage
Gardens,
With less impetus from the capital, annual price
Morningside, movements have gradually moved into modest negative
Edinburgh territory across the high-value suburbs in the home
Despite pockets of modest growth in the regions, expect Britain’s prime markets to remain counties, prime properties in the uber-towns of southern
price sensitive and driven by needs-based purchases until Brexit negotiations are complete, England and their village and rural counterparts.
In these markets, there was noticeably weaker price
say Lucian Cook and Frances Clacy growth in the run up to the slowdown.
Further north and into Scotland, markets have
been more robust. Lower values and slower price
What have been the key drivers in the prime What has this done to property prices in the growth in the past 10 years have meant less exposure
housing market over the past four years? prime London markets? to stamp duty and left them less sensitive to weakened
Much like the mainstream market, the uncertain political Even before the stamp duty overhaul in 2014, price growth sentiment. Here, modest annual price growth remains,
and economic outlook has made buyers more cautious had started to slow in prime central London as it started to with Edinburgh city the strongest market during
and price sensitive. The outlook for jobs and earnings look fully priced. That left it exposed to those stamp duty the past year.
in the City has been a particular concern for prime changes and marked a turning point in the market.
purchasers in London and the South East, though the Subsequent political events and changes to the tax
risk of wholesale relocation of jobs in the banking regime have led to values falling more gradually than in Political events and changes
industry has receded. other downturns, but over a much longer period. At the to the tax regime have led to
This has coincided with higher stamp duty costs end of September 2018, prices in this market had fallen by
and greater exposure to inheritance and capital gains 18.4% since 2014 – a comparable level to other significant
values falling more gradually
tax for overseas buyers. The impact of this has been downturns in the early 1990s and after the credit crunch. than in other downturns
most noticeable in prime central London. Other prime London markets, such as South West
Although the prime markets tend to be much more London, reached their peak a little later, in September
equity-driven than the mainstream, mortgage regulation 2015. The price adjustment there has been less severe
has also played a part in limiting the amount some than in central London, down 7.6% since 2014. However,
buyers can borrow as they look to trade up – both in annual price movements stand at -3.1%, similar to the
London’s established wealth corridors and beyond. most exclusive London neighbourhoods.
savills.com/research 16 17Prime markets
19% Rise in stamp duty take
in central London in the
past four years, despite
a fall in transaction levels
What are the prospects of a cut in stamp Cyril Mansions,
duty at the top end of the market? Chelsea, London
The latest comprehensive data we have on stamp duty
receipts relates to the 2017/18 tax year. It suggests that
transaction levels in London’s two central boroughs of
Kensington and Chelsea and Westminster have fallen
by 35% in the past four years, but that the stamp duty
take is still 19% higher than in 2013/14.
Furthermore, sales of properties of more than
£1 million across the country as a whole were 25% higher
in 2017/18 than four years previously. With a relatively
high proportion of purchases bearing the 3% stamp
duty surcharge as well as a higher underlying rate of
tax, they raised an additional £1 billion in tax revenues
over the same period.
In April, the Treasury calculated that cutting each
of the marginal 10% and 12% rates of stamp duty by 1%
would result in a loss in tax revenues of more than £100
million which made a cut look unlikely. Instead, we have
seen proposals for an additional surcharge on non-UK
resident buyers of between 1% and 3% that is expected
to increase tax revenues by up to £120 million.
What does history tell us about the prospects
for a recovery in the prime housing markets?
Historically, any recovery in the prime markets has
been sparked in central London, with a strong bounce
in values. Often, the catalyst has been a currency Historically, any recovery in the prime markets has been
advantage, though it requires this property to look sparked in central London, with a strong bounce in values
identifiably good value and for some of the uncertainty
afflicting the market to clear.
As a result, until Brexit negotiations are complete, London during that recovery phase. But they are more
we expect the market to remain price sensitive and likely to be held back by weak sentiment feeding up from
driven by needs-based purchases. the mainstream housing market. The impact of rising Savills Research
The experience of the past underpins our central interest rates will also be felt more strongly, given the We’re a dedicated team with an unrivalled reputation for producing well-informed and
London forecasts from 2021 onwards. However, the much greater use of mortgage debt in these markets. accurate analysis, research and commentary across all sectors of the UK property market.
prospect of increasing interest rates, higher investment That is likely to weaken any ripple effect into the
returns on competing assets and a general election in commuter zone. It is more likely that the relative value
2022 suggest a less exuberant recovery than in previous afforded by other prime regional housing markets Research
cycles, especially given the higher tax environment. will be a greater driver, meaning higher expected Lucian Cook Jim Ward Chris Buckle Jacqui Daly Lawrence Bowles
We expect the other, more domestic, prime markets price growth across the prime housing stock across Head of Director Director Director Associate Director
of London to benefit from a flow of wealth out of central the rest of the UK. Residential Research Residential Research Residential Research Residential Research Residential Research
020 7016 3837 020 7409 8841 020 7016 3881 020 7016 3779 020 7299 3024
lcook@savills.com jward@savills.com cbuckle@savills.com jdaly@savills.com lbowles@savills.com
Emily Williams Frances Clacy Nicholas Gibson Ed Hampson
Associate Director Associate Analyst Analyst
Prime variation Price growth in the past year and since 2014 (to September 2018) Residential Research Residential Research Residential Research Residential Research
020 7016 3896 020 7409 5905 020 7409 8865 020 3107 5460
Prime Other Suburban Commuter Wider Midlands/ Scotland ewilliams@savills.com fclacy@savills.com nicholas.gibson@savills.com ed.hampson@savills.com
central London zone South North
London
Annual growth
Sales Lettings Development Capital Markets Valuations
-3.8% -3.1% -2.8% -1.6% -1.2% 2.5% 2.0% Justin Marking Jane Cronwright-Brown Richard Rees Peter Allen Ian Malden
Head of Global Head of UK Lettings Head of Head of UK Operational Head of
Four-year Residential 020 7578 9980 UK Development Capital Markets UK Valuation
growth -18.3% -7.6% -3.2% 3.8% 6.9% 6.1% 4.0% 020 7016 3810 jcronwrightbrown 020 7016 3726 020 7409 5972 020 7409 8894
jmarking@savills.com @savills.com rrees@savills.com pallen@savills.com imalden@savills.com
Source Savills Research
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