During the first quarter of 2023, the sales market in prime London experienced a slight stall, whereas the lettings market witnessed a continuation of rent increases. The decline in buyer demand, influenced by the broader economic outlook, resulted in a decrease in sales volumes. Nonetheless, the number of sales remained relatively consistent with pre-pandemic trends.

There has been a rise in new property instructions, especially in higher-value markets, which could potentially signal an uptick in sales activity later in the year, provided buyer demand holds steady. However, it is uncertain whether these shifting conditions indicate a return to a more "normal" sales market or mark the beginning of a downturn.

As for the prime London rental market, activity also declined in Q1, primarily due to supply constraints rather than demand. With demand surpassing supply, rental values continued to grow throughout the first quarter. Nevertheless, the rate of rental growth has slowed compared to the rapid pace observed over the previous 18 months. As of now, there are no indications of this trend changing.

House prices and transaction levels in prime London experienced a decline in Q1 2023 compared to the previous year. According to the latest Sales Index, there was an annual change in property values of -0.4% and sales volumes dropped by 23%. Notably, the £5m+ market witnessed a significant decrease of 32% in Q1 compared to the same period a year earlier, but this aligns with the levels seen in 2019. It's important to note that this apparent drop is merely a return to past trends, following the record-high number of sales at the top end of the market in 2022.

Furthermore, the market slowdown is evident in the increased number of price reductions over Q1 2023. Across prime London, approximately 52% of properties sold in March had undergone price reductions, showing an increase from the low of 33% observed last July. Additionally, average discounts grew to 8.3% compared to 4.7% in July as well. This slowing trend coincides with the spring season, which is traditionally a busy period for property sales.

However, the overall market indicators present a more mixed perspective, displaying some positive signs. Notably, the number of deals falling through in all prime London areas has slightly decreased compared to Q1 of the previous year, and there is a rise in new property instructions. Additionally, there has been a 20% increase in the number of £5m+ properties going under offer during the first quarter, indicating a potential sales surge at the top end of the market in Q2.

Looking ahead to the rest of 2023, the performance of prime London markets may appear weaker in comparison to the booming times of 2021 and 2022. Nevertheless, the data from the first quarter suggests that the market is slightly ahead of pre-pandemic trends observed between 2017 and 2019.

In the long term, the well-being of the prime London market will be influenced by the broader economic and political landscape, as well as factors such as interest and exchange rates. Moreover, the sentiments of both buyers and sellers play crucial roles in shaping market dynamics.

Neighbourhood-level price movements exhibit even greater variation. The majority of local markets have demonstrated growth since Q1 2020, with St. John's Wood, Regent's Park & Primrose Hill emerging as the top performer, experiencing a substantial 14.6% increase in property values over the past three years.

On an annual basis, the results are more fluctuating, with most areas witnessing single-digit declines, while only Kensington, Notting Hill & Holland Park managed to maintain positive territory, with a modest increase of +2.6%.

Interestingly, the best-performing local markets in terms of sales activity do not necessarily align with price growth. For instance, Chelsea has seen the highest surge in activity during Q1 2023, boasting 25.6% more sales compared to the average of the first quarters between 2017 and 2019. However, property values have remained relatively stable over the past three years. Similarly, neighbouring Fulham & Earl's Court experienced an impressive 45.1% rise in transactions during the same period, yet it did not correspond to any significant growth in achieved sale prices.

Rental growth in prime London remained robust during Q1 but decelerated from the rapid pace witnessed in the preceding 18 months. As per the latest prime London Rental Index, there was an annual growth of 9.3% following a quarterly increase of 0.6%.

Specifically, prime central London experienced a slight quarterly decline in rental values of 0.6% in Q1, following strong growth in Q4 of 2022. On the other hand, rents in the prime London fringe area grew by 3.1%, although at a slower pace than in the latter half of 2022.

Despite relatively static capital values, average yields in prime London have been increasing, reaching 4.18% in Q1. This represents the highest level since 2012 and stands in contrast to their recent low of 3.28% in Q4 of 2020.

However, all indicators of lettings activity showed a decline compared to the previous year, indicating a market constrained by a lack of available rental properties. New lettings instructions fell by 11.3% in Q1 on an annual basis, while the number of properties going under offer and new lets agreed decreased by 12.3% and 19.2% respectively over the same period. Notably, all three metrics now lie below half of their pre-pandemic averages from 2017 to 2019.

In Q1, robust annual rental growth was evident in all local markets across prime London, with many neighbourhoods experiencing increases of over 10%. Particularly, North London emerged as the strongest performer, witnessing an impressive annual growth of 19.9% in Hampstead and 14.1% in St. John's Wood, Regents Park & Primrose Hill.

Interestingly, both of these areas defied the general trend by observing a higher number of new lets agreed in the first quarter of 2023 compared to the same period in the previous year. However, when considering a longer-term perspective, none of the local market areas saw new lettings surpassing 60% of their pre-pandemic average levels from 2017 to 2019 in Q1.

The data continues to show a robust rental market with strong pricing and activity. However, an analysis of average discounts and time on the market suggests a slight softening compared to the peak demand experienced recently. Last year, competition among tenants was so fierce that properties were achieving, on average, 100.5% of their asking rent in September 2022. Since then, this figure has fallen to 97.8% in March, but it still remains well above longer-term average levels.

A similar pattern is observed in the time on the market, which hit a 15-year low of 43.5 days on average in July 2022 before slightly increasing to 47.8 days in March. Additionally, the number of properties with reduced asking prices before being let has risen considerably, from a record low of 10.0% in July 2022 to 22.5% in March.

Overall, there is little evidence in the data to suggest a shift away from the high demand and low supply conditions seen in recent months. The primary factor limiting further double-digit rental growth in many markets appears to be the decreasing affordability for tenants.

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