Since their peak in 2014, average prime property prices in top London areas ranging from Kensington and Knightsbridge to St Johns Wood and Hampstead have fallen by 14 per cent, according to Lonres, a property data consultant. Gains during the residential boom of 2012 to 2014, have largely been wiped out.
Property prices, however, are beginning to stabilise at lower levels, maintain estate agents such as Knight Frank, Savills and others.
The media has tended to concentrate on uncertainties relating to the Brexit negotiations. But the main reason for house and apartment weakness is that the authorities have tightened regulations on foreign corporate purchases. In particular, clamps apply to opaque deals from tax havens. The moves aim to counter alleged money laundering, especially from Russia, the Middle East, China and Africa. The result is a marked reduction in international purchases.
A major disincentive for international purchases is a 15 per cent stamp duty on foreign companies and other entities. This tax applies to commercial and residential properties priced above £500,000 ($645,000). (Under that level, the tax is 3 per cent). Foreign investors also have to pay a minimum capital gains tax of 18 per cent if they profit from sales of their UK property.
Osborne’s steep rise in stamp duties also hurt locals
George Osborne, the former Chancellor of Exchequer under David Cameron’s Conservative Government introduced steep stamp duties for UK residents too. Thus, for example, a £500,000 property purchase has a stamp duty of £15,000; £1 million, a £43,750 duty; for properties of £1.5 million, the duty rises to £93,750 and at £2 million, £153,750. These stamp duties, rising on a scale from 2 per cent for low priced properties to 12 per cent above £1.5 million, have discouraged people from moving. The number of residential transactions has thus declined considerably in the past few years.
A sharp increase in new development supplies has also dented prices
“The increase in London’s prime supply pipeline remains unprecedented due to an exceptional number of construction starts between 2014 and 2016,” says Savills. It has been difficult to sell units in several new tower blocks, for example.
Foreign buyers who are unconcerned about Brexit and high property tax may decide to take advantage of lower prices and the pound slump and search for new development bargains.
“It’s still a buyer’s market for luxury London property but prices are falling at a slower pace,” says private bank Coutts. Prices fell 0.3 per cent in the second quarter 2018 compared to a 3 per cent drop in the first quarter. On average they are 1.7 per cent lower than a year ago. Sales volumes increased by 16 per cent in the June quarter but are still half 2013 levels.
Coutts adds that about half of available London properties offered for sale at prices of £1 million ($1.3 m) or more are being sold at average discounts of 11 percent.
Those who wish to invest and rent out the properties may well find that average gross yields of 2 to 3 per cent do not cover both economic and political risks. A hard left Labour Party election victory in 2022 could hammer property prices and sterling.
The rental market cannot be regarded as strong. According to national figures, London private rental prices decreased by 0.3 per cent in the 12 months to July 2018. This is the poorest performance since September 2010.
© Copyright Neil Behrmann
Neil Behrmann is London correspondent of The Business Times, Singapore. Jack of Diamonds his thriller on global diamond mining and smuggling, has recently been published. It is the sequel to the thriller, Trader Jack, The Story of Jack Miner.
See reviews of both books on https://www.amazon.co.uk/Neil-Behrmann/e/B005HA9E3M