Brexit uncertainty will cause prime house price drops in London for the next two years, with an uplift expected in 2021, Savills said in its latest house price forecast.
In prime central London spots such as Mayfair and Kensington, it predicts a 5% drop in house prices 2018, with a further decline the following year at a lower rate of 1%.
Prices are then expected to pick up, with a surge of 6% in the capital in 2021, followed by continued growth at a lower rate. Over five years Savills expects a total growth of 12.4%.
It said proposed additional stamp duty for non-UK tax-paying buyers will translate into extra caution in the market, slowing house price recovery.
While the report showed greater signs of initial recovery in London, Savills’ head of residential research Lucian Cook said market conditions will restrict this and noted that greater certainty is needed for values to rise.
He said: “A number of constraints – rising borrowing costs, increased taxation, higher investment returns on competing assets and a General Election in 2022 – point to a slower rate of recovery than in previous cycles.”
Prime outer London will mirror the trend of decline, stagnation and an uptick, but to a lesser extent, with overall growth of 7.1% expected for the next five years.
Savills points to a higher level of mortgage dependency in outer London driving lower growth levels as the market picks back up again in 2021.
The forecast said while these markets are less affected by stamp duty hikes (with more investment from domestic funds), they may struggle with employment and constraints on borrowing.
As wealth flows out of London, demand will be held back by weaker sentiment in the mainstream market and the effect of rising interest rates.
However, over the next five years, the wider South, Midlands, North of England and Scotland are all expected to out-perform London due to improved relative affordability.
The report forecasted the strongest growth in the Midlands and the North, where it expects 15.3% growth over the five-year period.
Cook said: “Our five-year projection may look ambitious at this moment of peak uncertainty, but it looks pretty modest when viewed against history. And history tells us that when prime central London house prices bounce, the speed of that bounce can take the market by surprise.”