As the UK economy continues to be subjected to inflationary pressures and rising interest rates, many of our clients are closely monitoring the property market to understand how these challenges may impact their investments and buying decisions in the coming months.


7th November 2022


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Q&A: Navigating the London property market

Experts in the Investec network explore the outlook for the London property market in the current economic climate.

As the UK economy continues to be subjected to inflationary pressures and rising interest rates, many of our clients are closely monitoring the property market to understand how these challenges may impact their investments and buying decisions in the coming months.

Here, Lucian Cook, Head of Residential Research at Savills, and Camilla Dell, Founder of Black Brick Property Solutions, explore how some of these inflationary pressures have impacted the property market, alongside Investec Private Banker Louise North.

Prior to the mini-budget, what factors have driven changes in the property market?

Lucian: During the pandemic, many people reassessed what they wanted from their home, and the race for space, the catalyst of a generous Stamp Duty holiday and the ability to lock in low interest rates drove price growth during this period.

Between March 2020 and June 2022, there was a significant divergence between the Prime Central London market where there was a lack of international demand, and regional prime markets. In Prime Central London, we saw a net price growth of 26% compared to a growth of 16% in the prime regional markets, and up to 21% in the prime country house markets.

More recently, as the London markets have begun to gather some pace, we’ve seen a slowdown in the prime markets outside of the city.

What is the current outlook for prime property in the UK?

Lucian: Much of what’s happening in the market has been driven by inflation expectations. Over the summer months we saw a significant change in the economic outlook, with an expectation that inflation might peak at highs of 13%.

More recently, we saw our seventh consecutive interest rate increase, bringing the base rate to 2.25%. This has put more pressure on people’s finances, while making people question the amount of debt they are comfortable with.

Against this context, we’ve seen a softening of people’s commitment to move within the short term. This has seen a notable increase of buyers ‘cutting their cloth’, with 29% of respondents to our most recent client survey saying they have reduced their budgets.

That caution has been exacerbated by more recent events and so it is likely see us enter a period of lower transaction volumes and a more price-sensitive domestic market; with some of the price growth seen in the past two years being eroded.  Central London is likely to be insulated from some of those pressures, given that buyers are much less reliant on debt.”

In terms of enquiries, what activity have you seen in the property market, since the mini-budget?

Camilla: The slump in sterling as a result of the UK’s ‘mini-budget’ has seen a rise of enquiries from buyers with funds in US dollars, who are looking to take advantage of the exchange rate. The enquiries have mainly come from buyers from the USA, Middle East and West Africa who are seeking homes in Prime Central London (PCL) with budgets which range from £3million to £20 million. These buyers will be purchasing at an approximate discount of 20% compared to the same period last year, a significant saving to say the least.

London remains a desirable choice for overseas buyers, particularly those from emerging markets, as it’s thought of a safe haven and has always provided reasonable yields combined with good long-term capital growth.

That said, there remains a supply issue in Prime Central London which is unlikely to disappear with the current drop in the pound, rising interest rates and inflation. Many homeowners with US dollar commitments will have purchased property when the pound was much stronger and will not want to crystalize their losses by selling.

Our view remains that we will see a “flight to quality” as we did in 2007/08. Buyers looking to diversify their wealth will be drawn to best in class assets. The main challenge will be finding those assets at reasonable prices.

We are yet to see evidence of price falls, but inevitably there will be some. We see this being limited to outer prime areas of London and in the sub £2m part of the market.

Given the supply issues that we’ve been experiencing, what is the best way for a buyer to find the right home?

Camilla: We recommend buyers use a buying agent as websites may not reflect the whole market. Forty-two per cent of properties we sourced for clients last year were not being openly advertised.

Buyers should also register with all of the estate agents in their area of interest and make sure that agents know that finance is in place as they are likely to prioritise organised buyers.

How are interest rate changes impacting the use of mortgages in the prime property market?

Lucian: While there is a lot of equity, there is still a relatively extensive use of mortgage debt in parts of the prime market. Within prime South West London, around two-thirds of buyers are using mortgage debt, whereas in Central London it’s at just over a third.  Here debt is more likely to be used on a discretionary basis as part of buyers financial planning.

Risk around interest rates has also seen an increase in buyers looking to fix their debt for a period of five years or more. As we move towards peak interest rates, we may see people locking into a variable rate to cash in on a potential fall in interest rates later down the line, especially given the recent disruption in the mortgage markets.

What is Investec seeing in terms of mortgage requirements?

Louise: Our approach to how we structure a mortgage means we can look at a client’s situation holistically and build a mortgage that suits their specific needs, so no one mortgage necessarily looks the same. That flexibility, coupled with the ability to get the transaction done quickly, is what helps in this type of market.

For example, some clients want to tailor repayment plans so that repayments coincide with liquidity events and support cash flow. We can also explore interest-only elements or fixed rate mortgage options for them.

We are familiar with complex income structures including a salary, bonus, foreign currency income or carry and this can help provide an accurate assessment of affordability and enable us to work efficiently. At the moment, this is especially beneficial for the banking or legal professionals we work with who want to leverage income in US dollars.

We’re encouraging anyone who wants to review their situation to get in touch to discuss the options.

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