A new report from Savills says the growing imbalance between demand and supply makes an eventual recovery in property values inevitable. According to the agency, the market is now in the first stages of recovery that will be led by the prime sector.
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Furthermore, there is clear evidence of restored investor confidence in residential bricks and mortar which has resulted in price rises in recent months (+4.3% in prime central London from March to June).

Despite early signs that mainstream values are following the prime markets in showing price increases, director of Savills Research believes that talk of a sustained recovery in mainstream market is premature.  They anticipate the prime sector (approximately the top 5% to 10% of property by price, quality and location), will lead the recovery and outperform the mainstream in the medium term as they are less impacted by limited mortgage finance and unemployment.

Transaction levels in prime central London are well up on the extremely low levels seen in 2008 building towards those seen in 2006, although the market is still dominated by equity-rich buyers.  Unusually for July, when the market is usually affected by the summer holidays, applicant numbers have barely faltered. Likewise the ratio of new applicants per property (a key indicator of future prices) held firm in July at a level much more akin to that of 2007 than 2008.

Savills expect that the supply of properties could improve in the autumn as growing prices attract more vendors back into the market and pent-up supply from delayed sales is eventually released.  This could again upset the fine balance between supply and demand, again tipping it in favour of buyers.  In this case, new stock for sale will take some of the heat out of the market.  

Under this scenario, the prime central London market is likely to correct downwards by just over 3% by the year end. This will eradicate some of the +4.3% rise seen in the second quarter.  Mrs Barnes continues: ‘Such falls would be consistent with the early stages of a market bottoming out and a period when prices ‘bounce along the bottom’.  

‘We have revised our forecast in terms of the shape of the recovery, foreseeing a longer period of bumping along the bottom before steady recovery but against a smaller overall downward adjustment.  We are now stating that prime central London values will at no stage fall below -25% from their 2007 peak, which is an improvement from our original -30% top to bottom forecast.

Savills believe that a two-tier mainstream market will develop where growth will be dependent upon low interest rates, an improved accessibility to mortgage finance and a recovery in economic growth.
‘The regional distribution of economic and social factors – not least repossession and unemployment numbers – will be reflected in the ability of house prices to recover and lead to deep variations on a region by region and property sector by sector basis.

‘Those best placed to take advantage of the recovery are those investors and developers who entered the downturn with low debt levels, access to equity and adaptable skills.  These will become the new and successful players in the residential property market in the future.’

* Prime country houses for sale