What does Liz Truss mean for the prime London property market?

As the idea of a new prime minister takes effect, how the government tackles the economic challenges facing the country remains a key topic for the property industy.  Knight Frank’s latest prime central London sales and lettings index reveals what Liz Truss could mean for the wider UK housing market.

There are also indirect repercussions for the property market in London’s prime postcodes from what the government says and does in the coming weeks.

What are some of the key pain points?

Truss rules out a windfall tax on energy companies at her first Prime Ministers' Questions. Doing this encourages inwards investment which is clearly a key plank of the government’s economic policy and proposed corporation tax rises will also be scrapped.

Consequently, that sends an apparently benign message to the rest of the world about the merits of investing in London, including its property market.

A support package which has been designed to assist households and businesses survive spiralling energy costs will also have repercussions. Not only will it reverberate up house buying chains by holding existing deals together and boosting affordability, but it will also help mainstream property markets more directly by keeping energy bills in check.

The risks facing the country, however, is monetary and fiscal policy pulling in different directions – assuming Andrew Baily remains in position. The conservative government is already effectively in pre-election mode and if tax giveaways stoke inflation, the Bank of England may be forced to raise rates faster, which would in turn, hurt demand by making mortgages more expensive.

On the other hand, if financial markets are unconvinced by the Truss approach and worried by the UK’s growing debt pile, there would be downward pressure on the pound, which would have a shock absorber effect for the prime market in London.

As the pound reaches new lows against the dollar and pegged currencies, discounts are widening and tempting buyers.

The final piece of the puzzle is rising rates. As they continue to increase, this will act as a drag on demand although to a smaller extent in prime London postcodes due to higher levels of housing equity and affluence.

In summary, there are long-term economic risks from a bout of short-term fiscal largesse since a short-term boost appears likely from a government already in a pre-election giveaway mode.

Knight Frank claim that the average prices in prime central London rose 2.8% in the year to August, unchanged on the figure in July and in prime outer London, a 5.2% rise also matches the previous month.

Rental demand continues to outweigh supply this year

Demand has continued to far outweigh supply in the lettings market in London and the home countries. While new supply was a third below the five-year average in August, Knight Frank's data suggests that the figure of new prospective tenants registering was 75% higher.

For landlords, the clear conclusion is that it won’t become a tenants’ market any time soon. As for tenants, there is still a need to move quickly and decisively due to the stock shortage.

While transaction volumes and prices in the sales market remain robust, there is less chance of so-called accidental landlords emerging to redress the imbalance. These are owners who fail to sell for the desired asking price, and instead, decide to let out their property.

That said, rising mortgage rates will ultimately curb demand in the sales market and create more landlords, although any meaningful movement is unlikely in the short term due to the gradual effect of people rolling off fixed rate deals.

It is also valid that the government's energy price support package will take some of the financial distress out of the sales market; indeed, this may encourage buyers and sellers to act between now and the next election in spring 2024.

Buy-to-let rather than accidental landlords may offer a better chance of increasing supply in the short-term and despite a haze of uncertainty surrounding proposals in the Renter’s Reform Bill designed to protect the rights of tenants, the extent to which rents have increased over the last 18 months is attracting buy-to-let investors.

The residential property market may once again prove it self-correcting credentials as more landlords put downwards pressure on rental values. Increases are narrowing as the effect of a large spike downwards at the start of 2021 works its way through the system, for now.

Rental values in prime central London rose 19.9% in the year to August, having dropped from 29.2% in April this year – the highest figure recorded in more than 20 years.

In prime outer London, the rise in August was 15.2%, and in addition to these inflation-busting increases, real estate is becoming an attractive asset class as other markets appear volatile.

Volatility indices have risen since August and one of the reasons the US dollar has strengthened in recent weeks is due to more investors looking for safe-haven assets.

For the time being, we would expect the double-digit increases to continue.   

Written by Tom Bill, Head of UK Residential Research at Knight Frank