London boom accelerates - price growth at highest rate for five years: UK Property Shop News

Knight Frank Prime Central London Residential Index April 2006 results

Headlines this month

* Annualised price growth in prime central London stood at 14.7% in April, the highest rate since March 2001

* Prices in "Super-Prime" London continue to outperform, prices in Chelsea (SW3) grew by 11.8% in the first four months of 2006

* The demand and supply imbalance is the "worst for a decade" - supply down 21% and demand up 43% year on year

Knight Frank's Head of Residential Research, Liam Bailey, comments: "The London housing market boom is not only continuing, but is actually getting stronger. There have been 16 consecutive months of price growth in central London, with the last monthly price fall recorded in December 2004. Since October last year prices have never experienced growth of less than 1% per month, and since February the monthly rate has not fallen below 2%. The market boom has now reached a level where an additional 11.8% has been added to the price of a typical Chelsea property in a matter of four months - an additional £14,978 per month, every month, for an average priced Chelsea flat (average price £507,724). We have pointed to the unsustainability of price growth at these levels for several months, however the market is being driven by an extremely strong combination of factors at the current time. There is an element of "catch-up" taking place after the London market underperformed the UK average between 2002 and 2005, the growth in City employment (up 5,400 in 2004 and 2005 and estimated to rise by 12,700 in 2006 and 2007 (source: Oxford Economic Forecasting) and bonus levels is fuelling demand, international buyers expressing strong demand and low supply levels."

"Across almost all parts of prime central London the first four months of 2006 have seen stock shortages in both the lettings market and more noticeably the sales market. Knight Frank research into this phenomenon suggests that no single factor is primarily responsible for supply shortages; rather it appears a complex network of potentially interrelated issues is acting to restrict the flow of properties to the market and lengthen the average turnover time associated with residential property. The issues we have identified include:

* High levels of investor ownership in certain parts of prime central London preventing the regular release of properties into the sales market.
Knight Frank Residential Research

* People moving up the property ladder are increasingly retaining ownership of their former home and then placing it in the rental market undermining the usual process of market replenishment that occurs when people move house.

* Overseas buyers and very wealthy buyers do not usually substitute the home they buy with one they sell. There is therefore no reciprocal give and take relationship with the property market as the supply is simply depleted.

* People are now buying homes as more long term investments. Whereas once people used to buy a home to last five years, they are now looking for a home to last between 10 and 15 years as the costs associated with a house move (stamp duty, legal costs and agents' fees etc) have risen. To extend the useful lifetime of their home, homeowners are investing more in developing and improving their current living environment and so are delaying the need to move.

* Potential vendors have observed the recent strong price growth occurring across prime central London and are holding out for further price rises before putting their homes on the market.

* There seems to have been a busy period of super-expensive large family homes being brought to the market in the run up to Christmas, temporarily exhausting the supply.

* A mini-epidemic of private sales has swept through certain parts of prime central London stalling the flow of properties to the publicly advertised market.

* Rising property prices are placing affordability constraints on the crucial lower end of the prime central London market. These constraints hamper homeowners from trading up and disposing of their smaller, more affordable 'first' home. As a result the supply of properties at the bottom end of the market is being squeezed.

* In the lettings market across certain parts of prime central London, investor landlords having recognised the strong performance of the sales market have opted to sell up and benefit from a large capital lump sum. This process is acting to deplete the pool of rental properties.

* Overall demand for residential property in prime central London was 43% higher in April this year compared to April last year, and supply of residential property is 21% lower over the same period."