Prime London housing prices forecast to rise 5% next year

LONDON: Prime housing prices in the UK capital are at an all-time high and will continue to rise over the next 12 months, according to real estate consultancy Knight Frank.

“We believe there is scope for further price gains over the next 12 months, averaging 5% across 2012. The reasons which have underpinned recent growth — a weak pound, renewed wealth creation in emerging markets, the search for safe-haven assets and flight capital — all seem set to continue at least in the short term, reinforcing our positive view for next year,” said Knight Frank head of research Liam Bailey in a recent statement.

“Our analysis of market activity in the three-month period to September, compared with the same period in 2010, confirms a sector in good health,” he said.

According to the Knight Frank Prime Central London Index report, prime central London price growth continued throughout September with a further 0.6% increase. Since April 2009, prices have been rising strongly and are currently nearly 5% higher than the previous peak in March 2008.

“If there has been an impact from European and global financial and economic market turmoil over the past few months, it seems only to have pushed more buyers into the central London market,” said Bailey.

The number of new buyers is up 7% over the three-month period to September while viewings are up 25%, matched by the number of offers for properties which has increased by 24%. The number of properties increased to 13% with the rate of sales effectively keeping pace.

Price growth in central London totalled 37% between March 2009 and September 2011 and this recovery is seen as the fastest in the market for 35 years.

However bullish the growth is, observers are questioning its stability.

There exists an element of speculation according to the report, prevalent in some of the purchases made in the past two years in London. With rising prices, new buyers are drawn to the market by even higher gains.

“Nevertheless, our research confirms that the majority of buyers in central London purchase for a long-term investment, not short-term price growth,” said Knight Frank in the report.

While Knight Frank remains optimistic about Prime London house prices, the forecast for average housing in UK may leave investors feeling underwhelmed.

Despite prime London housing looking bullish next year, Grainne Gilmore, Knight Frank head of residential research, believes that average house prices across the UK will drop by 5% in 2012, showing little convincing growth till 2015.

“Due to ongoing economic weakness, lacklustre earnings growth and the ramping-up of public sector spending cuts, these factors will take a toll on the housing market over the next 12 months,” she said.

In its 4Q11 UK Housing Market Forecast, Knight Frank says while the European and global financial and economic turmoil have pushed more buyers into the central London market, the 5% drop in prices in 2012 will leave property values nearly 15% below their 2007 peak. Knight Frank predicts that house prices will not hit 2007 levels again until 2028.

According to the report, with the adjustment to suit the CPI inflation, average house prices have fallen 21% since the peak of the market. According to the forecast, prices will continue to decline until 2015 with no sign of reaching previous highs until 2028.

Gilmore said that in order to bring back house price/earnings ratios back to sustainable levels, a price readjustment to suit CPI inflation is necessary.

“Our view is that while future affordability ratios will fall back from current levels, they will remain elevated above historical levels given the widening disconnect between supply and demand in the housing market,” she said.

She added that “the struggle for first-time buyers (FTBs) trying to enter the housing market contributes to our forecast. Whereas in 2007, FTBs could clinch a mortgage deal for more than their prospective house was worth, now they must save up for an average deposit of 15%”.

This article appeared on the Property page, The Edge Financial Daily, November 4, 2011.