Price growth of prime London property sales to be wiped out by rocketing rates

Premium broker says the sector will slow a little but that its decline is likely to be far less sharp than in the wider market

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The UK's economic turmoil is set to wipe out the price growth London's prime property sector has accrued to date in 2022, a premium broker said on Monday.

However, Prime London postcodes are unlikely to feel the adverse consequences of rocketing mortgage rates as profoundly as the rest of the housing market,

The sector will be protected by higher levels of affluence and housing equity as well as a broader base of returning international buyers, according to Knight Frank's head of UK residential research Tom Bill.

This protection is strongest in prime central London (PCL) where the percentage of cash buyers in the first nine months of this year was 52 per cent, compared to 30 per cent in prime outer London (POL), Knight Frank data show.

Mr Bill said the mortgage rate spike served as a “reminder” of their steady rise in recent months.

“The five-year swap rate, which is used to price most UK mortgages, is still more than 100 basis points higher than it was in mid-September,” he said.

“Even if the government can convince financial markets that they overreacted and mortgage rates calm back down, sentiment in the housing market has been damaged and people have been reminded that the era of ultra-low borrowing costs is ending.”

Mr Bill predicted a 3 per cent fall in prices in PCL followed by a modest rise in the years to come.

"The relative value in PCL compared to [the previous high of] 2014 will underpin an overdue recovery in the medium term."

He predicted POL prices would decline a percentage point further — 4 per cent — but said the much vaunted “race for space” trend had “not yet run its course” and would act as a bulwark against more slippage.

In both cases he said the declines would reverse the price growth seen over the course of 2022, although the headwinds are yet to slow both activity and price growth which he described as being in a “sweet spot”.

“The number of new prospective buyers in PCL and POL was 53 per cent above the five-year average (excluding 2020) in September,” said Mr Bill.

“Supply has also been picking up after being subdued for most of last year. The number of new sales instructions was 22 per cent above the five-year average and the number of offers accepted was up by 79 per cent.

“Annual growth in PCL was 2.7 per cent in September while the figure recorded in POL was 5.2 per cent, both figures that have remained broadly the same for the past six months.”

Housing crash unlikely but prices '30%' too high

The minimal disruption prefigured for property's more rarefied strata will come as cold comfort to large swathes of the homeowning population.

The fears felt in this sizeable cohort were heightened on Monday by Oxford Economics which suggested average house prices are currently 30 per cent too high.

Its chief UK economist Andrew Goodwin told Sky News the assessment was based “purely on increased interest rates” which he said would likely remain for “at least six to 12 months”.

He said the new levels would make repayments extremely difficult for large numbers who had taken out mortgages in the last 10 years at very cheap rates.

Despite this, he does not think a housing market crash is likely in the near term, despite transactions falling “quite substantially” due to higher mortgage rates

He said the true indicator of a housing crash would instead be the number of people that are forced to sell and because “so many people have fixed-rate deals in place”, this number would be lower than in previous downturns.

Updated: October 10, 2022, 1:24 PM