London house prices will be down 10 per cent since their peak by the first half of 2024 before finally bottoming out, Savills has predicted in its latest five-year forecast.
This will equate to another four per cent price drop next year, as mortgage pressure will continue to hamper would-be buyers.
But if the Bank of England starts to cut the base rate by the second half of 2024, pent-up demand and a stronger economic forecast will start to drive house prices up again.
“Interest rates are expected to have peaked,” said Lucian Cook, head of residential research at Savills.
“The worst of the house prices falls look to be behind us, but the first cut to rates still looks to be some way off.”
The strongest house price growth is forecast for 2027, with the average London home predicted to be worth £70,376 more by 2028.
London’s rocky rollercoaster ride
Their five-year forecast puts London’s property price growth by 2028 at 13.9 per cent, the lowest of every national region.
With higher house prices to begin with, London buyers need bigger deposits and must borrow more relative to their income.
When mortgage rates went up after 14 consecutive rate hikes, house prices fell the most in the capital where affordability pressures are felt most keenly.
But population pressure and a desperation to get on the property ladder fuelled by rising rents means demand will grow as soon as interest rates ease.
With the Bank of England holding the base rate at 5.25 per cent for the second time last week, there is hope it will eventually fall.
Savills predicts the base rate will stand at 4.75 per cent by the end of 2024, then fall by a percentage point each year to 1.75 per cent in 2027.
“The expectation of a gradual reduction in rates suggests a progressive restoration of buying power and steady recovery in demand,” explained Cook.
“We expect growth to accelerate as affordability pressures ease, with the strongest growth forecast for 2027 when rates reach their long-term neutral level,” he added.
“From there we expect growth to settle at a rate broadly in line with income growth.”
By 2028, Savills predicts, the average London house price will be £577,256.
House price forecasts by region (2024 - 2028)
Across the UK, Savills predicted house prices will fall by another 3 per cent before rising by 20 per cent between 2025 and 2028.
With total growth over the five-year period estimated to be 17.9 per cent, the average UK home would be worth £300,108 – £45,521 more than their 2023 value.
The North East and Wales could see the strongest total five-year growth of 21.4 per cent
However, Savills predict that this will be the inflection point for the regional markets, and London will lead once more in price growth at the end of the decade.
A different time for prime property
The prime property market in London has responded to a different kind of pressure.
In Prime central London (PCL), prices peaked in 2014 before falling 19 per cent as Brexit, political uncertainty, higher taxes – plus sanctions and a crackdown on money laundering in the property sector – cooled the ardour of the super-rich.
With most wealthy domestic and international buyers paying in cash, prices have been less affected by mortgage moves.
Savills forecasts that prices will not fall in PCL in 2024 – unlike every other part of the UK market – but its recovery will be more dependent on the result of the next general election.
In the meantime, the owners of mega-mansions in London looking to sell now have been under pressure to slash millions off their asking prices.
Savills predicts that it will take until 2028 for PCL properties to grow 18.7 per cent in value, almost back to pre-2014 levels.
“With prime property values still well below historic peaks in central London, a recovery looks well overdue,” said Frances McDonald, director of residential research at Savills.
“Values are likely at or close to their nadir, though we expect the bounce to be much less aggressive than in previous cycles given a higher tax environment and greater scrutiny of sources of buyer wealth.”
In outer prime London, where the market has been more impacted by higher debt costs, prices will fall 2 per cent in 2024 before starting an upward recovery of 2.5 per cent in 2025.
“But due to less reliance on mortgage debt, these markets are expected to respond more quickly to an uptick in sentiment than the mainstream average, with recovery projected from the middle of next year, pointing to a ‘buy’ opportunity for those with the means to transact,” said McDonald.
Buyers in outer prime London could hope to see their property increase in value by 17.4 per cent, Savills projected.
