The announcement of a general election by Prime Minister Rishi Sunak has cast a shadow over the UK property market, with Knight Frank revising its short-term forecasts for prime central London. While rents are expected to see upward pressure, house prices are predicted to dip.
Political uncertainty impacts forecasts
Tom Bill, head of UK residential research at Knight Frank, highlighted the effect of proposed reforms to non-dom rules on the property market. “Under the old rules, individuals could reside in the UK without being taxed on their worldwide income. Chancellor Jeremy Hunt’s plans to limit this period to four years, alongside Labour’s tougher proposals, have caused hesitation in the market,” he explained. As a result, Knight Frank has adjusted its forecast, now expecting a 1% decline in prime central London prices this year, a significant change from the 1% increase predicted in January.
Meanwhile, forecasts for the UK, Greater London, prime outer London, and the prime Country markets remain unchanged, as these areas are less susceptible to political risks and tend to follow economic cycles.
Interest rates and mortgage market
Beyond the election, April’s inflation data led to a sharp reduction in the likelihood of a rate cut in June. Although headline inflation fell to 2.3%, services inflation rose unexpectedly to 5.9%, impacting swap rates and mortgage lenders’ expectations. Bill noted, “Despite the bad news for buyers or anyone re-mortgaging, we expect demand to strengthen notably once a cut moves onto the agenda, similar to what occurred in early January with the brief appearance of sub-4% mortgages.”
Rental market adjustments
In the rental market, a faster-than-expected normalisation of supply and demand has led Knight Frank to lower its 2024 rental growth forecasts for prime London. Average rental values are now expected to grow by 2% in prime central London this year, down from 5.5% predicted in January, and by 2.5% in prime outer London, compared to the earlier forecast of 4.5%.
“Strong rental growth has been underpinned by a structural undersupply of rental housing, a competitive jobs market, high immigration, and rising mortgage costs,” said Bill. “Despite some improvements, supply levels remain tight.” Oliver Knight, head of residential development research at Knight Frank, added, “Private landlords in the buy-to-let sector continue to feel the pinch from higher interest rates and changes to taxation, leading some to exit the sector. Build-to-rent supply is increasing but not quickly enough to replace the lost buy-to-let homes.”
Looking ahead
As the general election approaches, its impact on the property market remains a significant concern. The combination of political uncertainty, interest rate fluctuations, and rental market dynamics will continue to shape the landscape in the coming months. With cumulative growth in prime central London still expected to reach 16.4% over the next five years, the market’s long-term outlook remains cautiously optimistic, despite short-term challenges.
