In the midst of Omicron, with political unrest caused by parties at 10 Downing Street, and the impending threat of further interest rate rises, experts predict house prices in London will continue to edge up slowly in 2022.
The return of overseas high net worth individuals and investors, and continued demand from first time buyers to live in the capital, with many companies calling employees back to the office, will be balanced by an uptick in stock.
Against a backdrop of rising living costs, all these factors combined will result in continued but temperate house price growth.
Here's the H&P guide to the economic, fiscal, political and behavioural factors that will shape the London housing market this year.
Home buyers will return to London
For approaching two years, the property market has been analysed through the prism of the pandemic.
The experience of the first lockdown pushed those families, who were already considering the move out of town, to act. This demand drove up competition and prices for homes in the leafy suburbs of outer London and much further afield.
The traditional commuter belt expanded even to the likes of Yorkshire, Northumberland and Cornwall in anticipation of continued working from home.
But "the race of space has a shelf life," says Tom Bill, head of residential research for Knight Frank. Bill believes the reopening of offices, the return of overseas buyers and students, and renewed appetite from first-time buyers who want to be close to work and friends will result in increased demand from wannabe buyers.
In fact, it's already apparent. The number of offers accepted in November reached a 10-year high. In central London the figure was 116 per cent higher than the same month last year. In outer London there was a 25 per cent increase, according to Knight Frank.
Forecast for London 2022: 4 per cent annual house price growth (Knight Frank)
Demand will be balanced by more homes for sale
In a typical housing market cycle this influx of demand would push up house prices dramatically (as seen after the Global Financial Crisis).
However, Bill and a collection of other property market analysts predict a significant uptick in supply too.
"We have already seen in January the number of sales instructions pick up," Bill says. During the stamp duty holiday lots of prospective buyers who wanted to move couldn't find the right house and therefore, in turn, didn't put their homes on the market to sell either, Bill continues.
"With increased confidence that the threat of omicron will subside we are seeing more properties listed. The smoother the landing from omicron, the more homes will be marketed [and built] and therefore the smaller the increase in prices," he says.
The Help to Buy countdown
Although the focus was on families upsizing during the pandemic, new data from Hamptons proves how active first-timer buyers were in London over the last two years.
Back in 2009, 32 per cent of homes in London for sale were bought by first-time buyers. This has increased steadily, and despite the pandemic and the temporarily closure of the property sector in March / April 2020, this share rose to 35 per cent last year, compared to 28.8 per cent in Birmingham.
Even the furlough scheme, which hit younger workers hardest, did not reverse this trend in the capital.
The stamp duty holiday temporarily scrapped the tax burden entirely between £350,000 and £500,000 which disproportionately helps FTBs in London – as homes are more expensive in the capital. Many took the opportunity to stretch themselves into that price bracket, encouraged by the return of high loan-to-value mortgages being relaunched last year.
Aneisha Beveridge, head of residential research at Hamptons, expects demand from first-time buyers to continue especially as buyers try to use the Government's shared equity Help to Buy scheme before it ends in April 2023.
"Affordability in London is still stretched, but first-time buyers still want to live near work and the social life that goes with it," she says.
Rising interest rates and inflation
There are other factors which will rein in the recovery on the first rung of the London housing market. "Interest rates came earlier than expected," says Beveridge, referring to the 0.25 per cent rise of the base rate in December. The next decision by the Monetary Policy Committee is scheduled for February.
"Back in September we thought rising energy prices and inflation were going to be temporary. This now does not seem to be the case and therefore we expect more interest rate rises to come this year," she says. Bill agrees: "a notable rise is in the post," he says.
While mortgage rates are at historic lows still, the combination of an increase in monthly repayments plus inflation (food and energy bills) means living is becoming more expensive which will have a dampening effect on house sales.
"Affordability is the biggest issue for Londoners wanting to buy their first home in the capital and pre-dates the Covid-19 crisis," says Beveridge.
With ongoing flexible working arrangements, this means more first-time buyers will look outside the M25. Again, this holds back runaway price rises in London.
A rise in cloak-and-dagger deals
Off-the-market deals where homes are sold quietly with no advertising are rife in prime central London. However, they are becoming more commonplace in the mainstream market too across Greater London and the Home Counties.
"We have so many prospective buyers on our books waiting for the right property to come up that as soon as we do a valuation we know who that home will suit. Therefore, more instructions are not being marketed," says Joss Cooper of Seymours in Surrey.
Chris Burton of Knight Frank in Dulwich estimates that around half of stock sold by his company is being done off-the-market. "Selling is a stressful and emotional process, especially for downsizers who may have lived in their home for 30 to 50 years", he says.
"They don't want to air their dirty linen nor do they want the neighbours gossiping. Often a sale will spark rumours of a divorce," he adds.
The impact of (political) garden parties
The housing market (particularly the luxury inner London market) reacts to any political instability and house price growth often falters at such times.
In the build-up to the 2015 election amidst the noise on mansion tax from wannabe Prime Minister Ed Miliband annual house price growth dropped from 13.2 per cent in January to 8.7 per cent in May.
In the month before the 2019 election, when the Conservative leadership was under threat from Jeremy Corbyn, annual house price growth dropped to -1.2 per cent, according to data from Knight Frank.
Instability during the Brexit years (2016 to 2019) also suppressed demand.
So, will the political storm surrounding Boris Johnson, Number 10 and the leaked revelations of parties at Downing Street during lockdown impact the housing market?
"We are still years away from the next general election and while there is instability in the executive, it is not more widely impacting the party," says Bill. "Plus, this is nothing compared to the uncertainty of Brexit," he adds.
Beveridge believes buyers are less sensitive to political unrest following the disruption of the referendum and negotiations that followed. "People are more focused on their home and their lives now rather than worrying about background noise," she says.
International buyers are back snaping up trophy homes
International buyers, that typically fuel the luxury inner London market, started to return last year after the pandemic hiatus. New numbers from Savills reveal that the £5 million plus market recorded its strongest year since 2013 in 2021 with 522 sales.
"The pound, which is still weak against the dollar, and lower prices, are attracting US, European and Middle Eastern high net worth individuals," says Becky Fatemi, founder of Rokstone Properties.
"We are not seeing eastern Asian buyers back yet due to stringent travel restrictions in that part of the world," she adds.
"The PCL market typically leads a property market recovery in the UK but the pandemic has disrupted the normal patterns with the highest growth in the leafy outer pockets of the capital. If the threat of Covid-19 variants starts to wane, I expect the cycle to reset with an influx of demand in central," Fatemi adds.
Forecast for 2022 in Prime Central London (PCL): 7 per cent (Knight Frank)
