Savills : Prime housing markets continue to adjust to uncertain times

The UK's prime regional housing markets have performed more strongly than London's top postcodes for over two years, as increased taxation and Brexit uncertainty have cooled the capital's prime markets.

The unexpected June 8 election will compound the uncertainty, but is unlikely to alter market dynamics significantly, says international real estate adviser, Savills, which today published its Prime London & Country Spotlight. The firm has reconfirmed its five year forecasts, issued in November 2016, which already make an assumption of continued economic and political flux.

'Our forecasts anticipate two years of lacklustre price growth during the Brexit negotiations, particularly in the prime markets of London which are most price sensitive,' says Lucian Cook, Savills head of residential research.

'The election is unlikely to shift that picture dramatically unless it brings the disruption of a change of government. Post election, consistency of government throughout the Brexit process has the potential to be a steadying influence on the market.'

'And however highly taxed the top end of the market now is, it will need to continue to need to absorb high rates of stamp duty. For now we believe that stamp duty reform is at best a possibility rather than a probability.'

Where are we now?

London: The effect of higher taxation has been most pronounced in prime central London, where average values are -13.2 per cent below their 2014 peak before the major stamp duty overhaul. Increased exposure to capital gains and inheritance tax for international buyers has also tempered demand, while the Brexit effect has compounded the general cooling across prime London as a whole.

Prices across other prime London fell by -3.9 per cent in the twelve months to the end of March 2017, but are only -2.7 per cent below their 2014 peak. Across prime London, homes worth over £10million have lost -15.5 per cent of their value since their 2014 peak, while those worth less than £1million have retained their value.

'Sellers need to adjust their expectations of value to bring them into line with buyers' expectations,' Cook says. 'Prime central London vendors appears to have understood this and price cuts have begun to bring buyers back in to the market. In the rest of prime London, the gap between buyers and sellers remains wider, contributing to a pool of overpriced stock. Further asking price cuts will be required.

'Our view is that however highly taxed the top end of the market is, and whatever the undoubted economic inefficiencies this creates, a rate cut in the short term remains only a possibility rather than a possibility. As such, buyers will need to continue to factor the charges into their purchasing decisions for the foreseeable future.'

Regional: Lower price growth over the past decade has left the prime regional markets looking less fully priced than London. The gap between the expectations of buyers and sellers is smaller and the market more fluid.

A slower London market has stemmed the flow of housing wealth out of the capital, but 46 per cent of Savills prime regional buyers came from London last year, compared to 37 per cent five years earlier, suggesting more buyers are attracted by the value gap. All regions are now showing positive price growth, though prices are up just 1.3 per cent over the past year and 8.5 per cent in the past five.

But there are some real extremes in the market, between different locations, price bands and type of property. In the North of England and Scotland prices remain well below their pre credit crunch peak, at -11.4 per cent and -14.2 per cent respectively over the past 10 years, compared to growth averaging 41.2 per cent across prime London.

Even in the prime suburban markets, values have risen just 10 per cent since 2007, representing real value for buyers who benefited from post credit crunch growth in London.

Prime regional buyers have increasingly favoured well-connected urban locations such as York, Chester, Bath, Bristol and Edinburgh. As a result, townhouses are worth an average 26.7 per cent more than 10 years ago, and values rose 3.1 per cent year on year.

By contrast, country houses, worth over £2million, have seen values fall -10.9 per cent in the past decade, slipping by -1.1 per cent in the twelve months to the end of March. These larger homes represent relatively good value and this is attracting some high ticket buyers back into the market. In the £3million-plus price range Savills saw new buyer numbers rise by two-thirds in the first quarter of 2017 compared to the same period in 2016.

Rare gems outperform

At the very rare and specialist end of the country market, the best estates are attracting attention. Value is determined by the performance of each of the separate assets - house, cottages, farmland, woodland, sporting rights. Over the past decade, values have risen an average of 34 per cent, driven largely by land values, which rose 150 per cent.

However, with evidence that commercial farmland values may have peaked, growth is being driven by scarcity and amenity. The 'marriage' value of the whole estate rather than the individual components, is being driven by strong demand in a market where stock is now extremely low.

In the bull market of late 2006 and early 2007, the marriage value added 19 per cent to the value of the parts, before bottoming out at 9 per cent in 2009. The rarity factor has given the marriage value a 39 per cent boost over the past five years, outperforming all other prime residential market segments, with 15 per cent growth in 2016 alone.

Last year, there were just twenty-nine £5 million-plus estate sales where the land value was at least 200 acres, with a total value of over £330 million.

The Savills five year forecasts are for prime central London values to rise a total of 21 per cent by the end of 2021, other prime London by 15 per cent, with the prime regional markets ranging between 20 per cent for the inner commuter zone to 12 per cent in Scotland.