Political uncertainty ahead of a general election means Knight Frank has have reduced their near-term forecast for prime central London, but upwards pressure remains on rents.

The political uncertainty hanging over the UK property market has come into sharper focus since Rishi Sunak announced a general election last week. In particular, the reform of non dom rules had been causing a degree of hesitation in prime markets since they were proposed in March, according to Tom Bill, head of UK residential research at Knight Frank.

He explained: “Under the old rules, individuals could be resident in the UK without being taxed on their worldwide income. Chancellor Jeremy Hunt set out plans to limit this period to four years although there were indications he was prepared to loosen the proposals. Not to be outflanked, Labour devised their own tougher rules, which are still to be fleshed out.

“The combination of two different sets of proposals and the uncertainty of a general election has understandably caused hesitation in the property market.

“Given the near-term outlook for demand in prime central London (PCL) has deteriorated over the last two months, we have revised our forecast and now expect prices to fall by 1% this year, down from a rise of 1% predicted in January. All revisions to our forecasts were made before the election was called. As a long-overdue period of price inflation kicks in, we expect cumulative growth of 16.4% in the five years to 2028 in PCL.”

Meanwhile, Knight Frank’s forecasts for the UK, Greater London, prime outer London, and the prime Country markets have remained the same. These are all markets typically less exposed to political risk that tend to follow economic cycles.

Away from Westminster, the chances of a rate cut in June fell sharply after the release of inflation data for April last week. Headline inflation fell to 2.3% but services inflation was higher than expected at 5.9%. In a familiar chain of events, swap rates rose, money markets reduced their rate cut expectations and mortgage lenders, keen to lower their rates, were left feeling frustrated.

Bill continued: “Despite the bad news for buyers or anyone re-mortgaging, we expect demand to strengthen notably once a cut moves onto the agenda, which is what happened in the early weeks of January as sub-4% mortgages made a brief appearance. The Nationwide UK index topped out at 2.3% in January before falling as mortgage rates began to climb. The Halifax peaked at 1.6% in March, the same month that mortgage approvals reached an 18-month high. We expect demand will increase as rates begin to fall in the second half of the year. From the summer, there will also be a sharp fall in the number of people rolling off sub-2% mortgages agreed in 2022.”

Sales

In the lettings market, the normalisation of supply and demand has happened more quickly than we expected in January, which means we have cut our 2024 forecasts for prime London rents. Knight Frank now expect average rental value growth to be 2% in prime central London this year (versus 5.5% in January) and 2.5% in prime outer London (versus 4.5%).

Bill commented: “Our rental forecasts between 2025 and 2028 have stayed largely the same or been increased slightly, which is also due to rising political uncertainty.”

“Strong rental growth has been underpinned by a structural undersupply of rental housing, as well as a competitive jobs market, high immigration, and rising mortgage costs,” he added. “At the same time supply levels, while showing some signs of improvement, remain tight. The latest RICS survey confirms that the gap between demand and supply in the rental market is still significant.”

In the absence of meaningful government support for first-time buyers, higher interest rates will also keep tenants renting for longer, keeping overall rental demand high.

“It is unlikely that rental supply will increase in the next few years at a level that will materially impact headline rental growth,” said Oliver Knight, head of residential development research at Knight Frank. “Private landlords in the buy-to-let sector continue to feel the pinch from higher interest rates and changes to taxation which have resulted in some exiting the sector. Build to rent supply is increasing, but not fast enough to replace the BTL homes lost.”

Rents