The capital connection

The relative strength of the relationship between the prime regional markets and the capital has been one of the key drivers of market strength during the past 12 months.

This is ably illustrated by the fact that annual price growth in the South East England prime markets reached 10.4% by the end of March 2010, much higher than in the mainstream markets of that region.

In contrast, annual price growth in the other prime regional markets averaged just under 4%, which was less than the growth recorded for just one quarter in South West London (See Graph 1).

Capital comparisons

Beyond the South East, the prime markets most connected with the capital have tended to be the second-home markets. Much like London, 55% of demand in the £1-to-£2million second-home markets originates from the financial and business services sector, although, unlike London, it is far less international and the domestic buyer accounts for as much as 87% of the market.

Second-home values rose by 8.3% in the year to the end of March, clear evidence of this relationship with prime London. This was fuelled by the high transaction levels in the last quarter of 2009, when second-home sales were 40% higher than the average for the past three years.

This outperformance was greatest in Cornwall, where second-home buyers accounted for more than four out of every ten prime property transactions, and values increased by 16.5% year-on-year, followed close behind by Devon with growth also into double digits (See Graph 2).

By its very nature, the demand for second homes tends to be highly discretionary, particularly in those locations where second homes are used as a holiday home, for instance Devon and Cornwall, as opposed to a more regular weekend retreat locations, such as the Cotswolds or Suffolk. As such, these markets usually show much more short-term price volatility than the prime regional markets as a whole.

Local Authorities

Based on the past decade, we know some of the highest rates of house price growth are in locations with the highest proportions of second-home ownership (see Table 3.1 in the gallery).

In the Noughties, price growth in the top ten local authorities by second-home count topped 160%, compared to just 117% on average across the UK, according to Land Registry data.

We expect future demand to be sustained from equity-rich upsizers buying their main residence. Over the next five years this is likely to mean price growth will be more consistent in the prime South East markets than the second-home hotspots further afield, even if both continue to attract demand from City generated wealth.

In contrast, the prime second-homes market is more dependent on the accumulation of disposable wealth, which is likely to be much harder to achieve in a post-recession environment. Certainly this will have an impact on the lower value second-homes markets, and is also likely  to put some pressure on transaction levels in the upper tiers of the market.