The London property market won’t bounce back until 2021, but once the slump is over the capital will return to being the fastest growing part of the UK, economists have predicted.
KPMG said continued uncertainty around Brexit, together with a potential rise in interest rates, could trigger adjustments in house prices and moderate growth in most regional markets over the short-term.
Growth is also likely to be stalled by the continuing effects of the stamp duty changes that came into force in spring 2016.
It comes after data revealed average property prices in London fell this year for the first time since the financial crisis.
There are fears the housing market could suffer further when the UK leaves the EU in 2019.
But KPMG said the market will start to pick up again in 2019 and that London will be the driving force behind growth by 2021.
KPMG chief economist Yael Selfin said London has unique characteristics that make it more resilient to price fluctuations than other regions in the UK.
She pointed out that London’s property market isn’t just made up of people’s homes.
“Foreign investors plough money into property in the capital as it is seen as a safe haven asset, and they will continue to do so after Brexit, especially if sterling remains weak,” she said.
“If the UK’s exit from the EU is done in a positive way, we’re likely to see demand for property in the capital rise as it will remain one of the most vibrant and exciting cities in Europe” – Yael Selfin, KPMG
KPMG’s projections assume the Bank of England will increase interest rates next year, which will feed through into mortgage rates, affecting the affordability of borrowing and slowing down the rate of house price growth.
Other factors affecting the projections include trends in regional employment and population, which will affect the degree of housing shortages experienced across regions.
Selfin said: “With so much going on in the UK at the moment, some fear that the housing market will be the first to snap if the mood changes around the Brexit process or when interest rates start to rise.
“Our analysis however shows that with the exception of a few areas in the south such as London, house prices are not particularly high compared to long-term regional valuations. Our projections see a more orderly transition over the next five years, with house price growth moderating further next year before gradually picking up momentum again from 2019.”
Figures from Halifax show UK house prices in the three months to September were 4 per cent higher than in the same three months a year earlier, while month-on-month prices are up by 0.8 per cent.
But although the quarterly and annual rates of house price growth have improved, they are lower than at the start of the year.
Mark Harris, of mortgage broker SPF Private Clients, told the Telegraph: “The housing market shows no signs of faltering, despite the ongoing Brexit saga and hints from the Bank of England that interest rates will need to rise sooner rather than later.”
DealMakerz thinks the fall in London property prices is a further sign that affordability concerns, stamp duty changes and Brexit fears are starting to bite.
But the attractiveness of London to the rest of the world means the slump won’t last long.
After all, research shows buying a property in the capital is one of the best investments you can make.
The 2007/08 credit crisis was a mere blip in the meteoric long-term rise in the capital’s property prices over the last 20 years.
And the continued investment in London’s infrastructure means it will continue to be an attractive option for foreign buyers.