Mortgage rate rises starting to hit Prime London sales, says Knight Frank

Knight Frank expects prices to fall by 3% next year in Prime Central London (PCL) before rising modestly in the years after that.

It comes in the wake of Kwasi Kwarteng’s disastrous mini-Budget, which spooked the financial markets and saw mortgage rates soar as fears of much higher interest rates gripped the housing market.

Tom Bill, head of UK residential research at Knight Frank, said: “If nothing else, the mini-Budget last month was a reminder that mortgage rates had only been heading in one direction - up. However, in the days after the Chancellor presented his economic growth plan, the adverse reaction on financial markets sent interest rate expectations even higher. The five-year swap rate, which is used to price most UK mortgages, is still more than 100 basis points higher than it was in mid-September.”

He claimed that, even if the government can convince financial markets that they over-reacted and mortgage rates calm back down, ‘sentiment in the housing market has been damaged’ and people have been ‘reminded that the era of ultra-low borrowing costs is ending’.

Bill says higher mortgage costs will reverberate up through housing markets and be felt in prime London postcode, but he believes the impact will be less notable due to higher levels of affluence and housing equity, as well as a broader base of returning international buyers post-Covid.

“This is particularly the case in PCL, where the percentage of cash buyers in the first nine months of this year was 52%, compared to 30% in prime outer London (POL),” he added.

Despite this greater resilience, the agency is anticipating price falls in 2023. “The relative value in PCL compared to 2014 will underpin an overdue recovery in the medium term. While we expect a 4% decline in POL, the ‘race for space’ trend has not yet run its course and will support demand beyond 2023. In both cases, the declines would reverse the price growth seen over the course of 2022,” Bill went on.

For now, Bill said activity and price growth remain positive, with the number of new prospective buyers in PCL and POL some 53% above the five-year average (excluding 2020, when the pandemic was at its height) in September.

“Supply has also been picking up after being subdued for most of last year. The number of new sales instructions was 22% above the five-year average and the number of offers accepted was up by 79%,” he explained.

“As we explored here, prime London markets have spent the last few months in the sort of sweet spot that doesn’t last forever. While we expect demand and price growth to come under pressure in coming months as mortgage rates remain high, there are no obvious signs yet.”

Bill said annual growth in PCL was 2.7% in September while the figure recorded in POL was 5.2%, both figures that have remained broadly steady for the past six months.