The Prime Markets Beyond London

Judging by levels of annual price growth, the market for prime residential property beyond London appears to remain fairly subdued. Over the year to the end of March 2016 prices rose by just 2.6% on average. However, against the context of an uncertain economic and political backdrop in 2015, data from the Land Registry suggests that sales of £1m+ property beyond London rose by 3% (while those in the capital fell back by 6%). Nothing to get overly excited about, but certainly a reflection of a gradual return to confidence. Of course averages hide significant variations between different submarkets.

Regionally speaking

Since the market bottomed out in 2009, the markets closest and most accessible to London have seen the strongest recovery, though comparatively much weaker than in the capital itself. In the prime London market, prices are some 35% higher than they were pre-credit crunch, despite recent headwinds. By contrast, prices in the outer commuter zone (namely up to an hour by train from London) are just 5.3% above their 2007 level, while other regional markets are yet to get back to levels seen some eight and a half years ago.

Urban effect

The strongest markets continue to be in affluent urban locations, which have outperformed their rural and village counterparts across all regions. The gap between prices in London and the likes of Beaconsfield, Guildford, Winchester, Bath, Cheltenham, York and Edinburgh have started to narrow. However, in historic terms the gap still remains wide.

This has not gone unnoticed by buyers from London. Previously they have been reluctant to trade out of the London market, given the extent to which its value has been rising. That is now much less of a concern. The stamp duty costs of upsizing in the capital and limits on what can be borrowed are acting as catalysts for a greater flow of wealth into the prime regional housing markets.

This has contributed to the emergence of high value neighbourhoods in our towns and cities, though in truth this is part of a longer term trend. The experiences of Oxford and Cambridge, which we have looked at in greater detail later in the document, bear witness to this.

Accordingly, we have seen townhouses rise in value by more than other property types over the past five years. By contrast, large country properties have remained much more price sensitive, in part because of successive increases in stamp duty at the very top end of the market, but also reflecting a wider change in the nature of demand for prime property. Over the past year, prices of manor houses have remained flat on average, having fallen back in value by 5.1% over the past five years.

^{▲  Locations such as Bath have seen the price gap narrow}

^{Source: Savills Research}

Additional Stamp Duty

While there are signs that historic stamp duty increases have now been priced into the market, taxation is likely to continue to shape it in the future. The 3% surcharge for additional homes is likely to mean that second home and coastal markets remain price sensitive.

It is also likely to mean that London buyers are less inclined to keep a foothold in the London market. This may focus buyer activity in key commuter towns and mean more demand for higher value property in these locations, though bridging is likely to become both more difficult and more expensive.

What’s on the horizon?

More generally, the relative value offered by prime housing in the commuter zone compared to London, and property beyond the commuter zone compared to that within it, is likely to underpin a more sustained ripple effect as sentiment improves.

A weaker economic outlook and uncertainty around our relationship with the EU indicates that it will take time for that sentiment to build. Consequently, we are forecasting that prices in the prime regional markets will only increase by an average of 2.5% across 2016.

On the flipside, it appears that this will be against the context of interest rates staying lower for longer, allowing the ripple effect to spread wider as confidence picks up and meaning that over five years we are forecasting average price growth of 22.2%.

Prime Regional Property

How the markets in London and beyond have performed

^{Source: Savills Research}

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The Residential Property Focus is a comprehensive view of the UK’s housing market. Read it here