The top end of the UK’s residential market is experiencing a growing divergence between heavily mortgaged and equity rich prime segments as interest rates rise, according to the Q4 prime sales index from property firm Savills.
However, buyer and seller expectations are adjusting quickly, with both more realistic about price readjustments after two years of record growth.
Greater resilience of the higher value market segments
From a price point perspective, lower price bands have so far been the most impacted by a tougher economic outlook, and rising interest rates. London properties valued below £500,000 have seen prices fall -2.1% over the past three months (but are up +0.3% on the year), whereas properties valued £2 million and above have recorded a more modest fall of -0.7% on the quarter, and are +2.3% up on Q4 2021.
Prime central London locations including Mayfair (+0.4%), Belgravia (+0.0%) and Knightsbridge (+0.0%) proved the most robust over the final quarter of the year, as well as the regional £2 million-plus country house market, where average values have adjusted by just -0.4%, and remain a significant 21.2% up on March 2020.
“High value properties continue to outperform across the board as unique quality homes remain sought after by buyers, both domestic and overseas. These markets are driven more by flows of global equity and although not immune, they are dictated less by domestic economic volatility,” comments Frances McDonald, research analyst at Savills.
“The rarefied market of central London’s top postcodes also continues to look good value in historical terms, particularly when seen in the context of the weaker sterling and strong dollar. A price recovery in this market appears long overdue. This will help shield it from more significant price falls, with stronger recovery in prices expected to materialise from 2025.”
Mortgage vs equity and cash-rich markets
Less reliance on borrowing will cushion the most expensive London markets from the affordability concerns governing lower value markets. In London, prime central London and the North West experienced the smallest falls on the quarter (-0.6% and -0.2% respectively).
By contrast, South West (-1.4%) and West (-1.9%) London saw the greatest slowdowns on the quarter. This swathe of outer prime London, which runs from Clapham to Chiswick, has a larger proportion of highly-leveraged family home markets where around two thirds of prime buyers use a mortgage. These leafy suburbs have proven particularly popular since the start of the pandemic and have seen some of the strongest price growth (+8.2% in SW vs +1.7% in PCL)
Across UK regions, markets furthest from London, where mortgage affordability is least stretched, have been the strongest performers on the quarter – including Scotland (-0.7%) and the Midlands and North (-0.1%).
By contrast, the relocation markets closest to London where between 55% to 67% of prime buyers have a mortgage, are already feeling the pinch of base rate hikes. As such, there has been a more abrupt price adjustment over the quarter, with prime prices falling by an average of -2.0% across the suburbs and inner & outer commuter zones. However, these falls are coming off an incredibly strong base, with prices in the suburbs up by +16.5% since March 2020, and by +12.7% across the commuter belt.
“Economic uncertainty and a tougher lending environment are starting to translate into slower market conditions in those markets which are most exposed to a higher cost of borrowing. However, the amount of quality stock on the market remains limited, with nearly half of Savills agents reporting a decrease in the number of properties on their books over the past three months,” comments Andrew Perratt, head of UK residential at Savills.
“This should ensure that the most sought-after properties continue to attract strong interest, cushioning markets from more significant falls. Encouragingly, expectations are also adjusting quickly, especially in London, with almost all buyers (96%) and three quarters (75%) of sellers expecting to see some reductions in prices. That buyer and seller expectations are moving pretty much in tandem should help keep the market moving.”
Prime London sales index, Q4
| Q4 2022 | Prime Central London | Prime North West London | Prime South West London | Prime West London | Prime North and East London | All Prime London |
| Quarterly growth | -0.6% | -0.2% | -1.4% | -1.9% | -2.2% | -1.3% |
| Annual growth | +0.9% | +3.2% | +1.4% | 0.0% | +1.8% | +1.5% |
| Growth since Mar-20 | +1.7% | +6.8% | +8.2% | +4.8% | -0.8% | +3.9% |
Source: Savills prime London index, Q4 2022
Prime regional sales index, Q4
| Q4 2022 | Suburbs | Inner Commute | Outer Commute | Wider South | Midlands/ North | Scotland |
| Quarterly growth | -2.1% | -1.6% | -2.2% | -1.1% | -0.1% | -0.7% |
| Annual growth | +2.6% | +1.3% | +0.8% | +2.8% | +3.1% | +3.3% |
| Growth since Mar-20 | +16.5% | +12.6% | +12.7% | +17.3% | +13.6% | +16.3% |
Source: Savills prime regional index, Q4 2022
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