This week Knight Frank give their end of year report on the UK housing market and forecast for 2018.

Sales

“The sales market in prime central London (PCL) continues to move towards recovery mode as pricing adjusts to higher transaction costs and political uncertainty. Average prices were flat in the three months to November, which took the annual fall to -2.2%. It was the most modest rate of decline in more than a year and suggests that price declines are bottoming out.

Supply and demand indicators also underpin our view that pricing will remain relatively flat in the near-term. While the number of new prospective buyers is rising, the level of new stock coming to the market declined over the course of 2017. However, any recovery is not happening in a uniform manner. Instead, the market remains stratified and performance is linked to variables that include price bracket, the level of specification and amenity and the extent to which stamp duty rises have been priced in.

For example, properties worth £5 million-plus in PCL experienced a more rapid decline in pricing than sub-£5 million properties due to the effects of higher stamp duty. Pricing at this level is now recovering more quickly than the rest of the market, a trend we expect to continue into 2018.

Meanwhile, we expect sales volumes across prime London to remain below their historical rates in the near-term as stamp duty continues to have an impact on liquidity. Uncertainty generated by Brexit will also continue to impact sentiment, although an orderly transition period could see some pent-up demand released from 2019, which would have a positive effect on pricing.”

Lettings

“Rental values in prime central London fell 2.4% year-on-year in November, which was the most modest decline recorded since May 2016. Rental value declines are bottoming out as the rate of new supply slows down, which has been the result of fewer ‘accidental landlords’. In other words, fewer would-be vendors are opting to let their property as pricing and sales volumes stabilise in the sales market.

Other factors indicate that rates of new stock coming onto the market will decline, underpinning our forecast that rental values will move from negative to broadly flat in the near-term in prime central and outer London. First, the large spike in new stock that followed the introduction of the additional rates of stamp duty in April 2016 has been largely absorbed by the market. Second, a series of tax changes affecting landlords will cause some to re-evaluate their portfolios and act as a brake on new supply. Meanwhile, demand is likely to remain strong, particularly in the lowest and highest price brackets.”