Downward price pressures in London eases, driven by slump in homes coming up for sale: Capital Economics

Downward price pressures in London have eased, driven by a slump in homes coming up for sale. But with house prices high and mortgage interest rates close to their floor, that is unlikely to drive a recovery in prices soon, according to the latest research report from Capital Economics.

Rather, a 1 percent fall in house prices during 2020 is expected, and flat prices in 2021. That said, the outlook for rents is stronger. The growing imbalance between rental demand and supply in London will push rents up by a further 8 percent or so by 2021.

Economic indicators point to weakening growth nationally, but GDP growth in London may have held up better. Meanwhile, the data painted a mixed picture of the labour market – employment growth fell, but wage growth held up fairly well.

Housing market activity in London fell in November, seemingly driven by a drop in cash sales. That might reflect uncertainty among buyers, particularly around the election and Brexit. Leading indicators suggest that this trend will continue, the report added.

House prices and rental values have been weak. Indeed, prime central London house prices fell sharply in the year to September, while prices elsewhere were broadly flat.

"Meanwhile, London rental growth of 1 percent y/y in November underperformed our expectations. But with the imbalance between demand and supply widening in Q4, we expect rents to surge in 2020 and 2021," the report added.

Housing supply in the Capital looks set to weaken over the next year or so, with housing starts down sharply compared to a year earlier.