For much of the last decade, London house prices have been as close to bulletproof as an asset class gets, rising with the inevitability of the tides, or an apparently deceased villain in a bad horror movie.

So even a relatively tentative indicator of weakness, such as the 0.6% fall in the capital’s house prices over the 12 months to September revealed by Nationwide last week, feels portentous. The question now is whether this is a prelude to weaker price growth, or all-out correction.

That was ‘the first [annual] decline in eight years’ noted Samuel Tombs, chief UK economist at Pantheon Macroeconomics, even as national pricing rose by 2%.

‘Nationwide’s index is based on its mortgage offers for people who likely began looking to buy a home well before the [Bank of England] warned earlier this month that interest rates will probably rise soon.

‘With the real wage squeeze set to remain intense over the next six months and mortgage rates about to rise, we continue to think the housing market will weaken further over the winter.’

A year of warnings about the near evaporation of liquidity at the top end of the market following Brexit and hiked stamp duty, and a significant overhang of speculative development south of the river, have primed people to look for evidence on the downside.

Some 17,000 ‘prime’ properties are due to be completed in the capital in the next 15 months in historically non-prime locations, according to property consultancy Arcadis. The daily press this summer has been filled with stories of the lengths developers are going to in order to avoid marking down prices.    

Inducements or bribes?

At the very top end, inducements include £18,000 cars and luxury electronics, according to estate-agent-to-the-rich Garrington Properties, while lower down the market developers such as Barratt and Taylor Wimpey have dangled free travel cards and furniture to try to lure in potential buyers.

Actual evidence of price falls has nonetheless been rare. At the most volatile end of the spectrum of indicators, initial asking prices fell 3.2% in London over the year to September, led by a 5.3% fall in central London boroughs, reported online portal Rightmove. 

At the other end of the scale, data from the Land Registry – the only major index compiled from actual achieved sales prices – reported a 2.8% rise in London prices in the 12 months to July.  

Inflation-adjusted, pricing has already peaked and rolled over, noted UBS. ‘Real prices are 2% lower’ than the 2016 top, the bank noted in its annual bubblewatch property report.   

‘Favourable credit conditions and the help-to-buy scheme have kept demand in the lower-price segment high. But the prime market now faces oversupply as increased stamp duties on luxury and buy-to-let properties hamper demand.’

Volume data showed weaker prime pricing has begun to lure buyers, data from Knight Frank suggested, with the number of completed sales rising 6% in the first half. Over the longer term liquidity remains much reduced, 10% below the same period of 2015 and 28% below 2014.

Buyers also remained highly price sensitive said Tom Bill, the estate agent’s head of London residential, saying there remained only patchy evidence that prime prices were bottoming out. 

‘Higher-value properties outperformed lower value properties for the sixth consecutive month in August, demonstrating how the market is adapting to the changed fiscal landscape,’ said Bill.

‘Prices between £5 million and £10 million were down 3.7% in the year to August 2017 compared to a decline of 5.4% across the whole [prime central London] market, and a drop of 6.7% between £1 million and £2 million.

‘The last time there was a similar outperformance was in the second half of 2009, during the initial stages of the global financial crisis when the safe-haven appeal of the prime London residential market rose strongly.’

Buying on price weakness

Many have taken as read that middle-class Londoners would buy any price weakness outside central London – an impression boosted by the government’s commitment of a further £10 billion in Help to Buy funding last week, of which they have been a primary beneficiary.

But the fact that August mortgage approvals are 3.3% lower, led by a 2.7% fall in house purchase deals and an 8% decline in ‘other’ transactions – primarily equity release and buy to let – have suggested that Bank of England warnings on credit conditions are starting to hit home.

So long as employment remained buoyant, that stress was unlikely to turn into outright cracks, said Capital Economics’ chief property economist Ed Stansfield.  

‘With no signs of a downturn in London’s labour market, we suspect it reflects sellers finally taking a more realistic view of what their homes are worth. If so, it is unlikely to be the start of a sustained correction. That said, data on buyer enquires and newly agreed sales offer little hope of any end to the current slowdown any time soon, either in London or elsewhere.’