THE fizz has gone out of the London real estate bubble and the property industry is calling for a reduction in stamp duties to lift activity and prices, writes Neil Behrmann. According to LonRes, a property data company, Savills, Knight Frank and other agents, prime London residential transactions have slumped and on average prices are down by 5 to 10 per cent in the past twelve months and by 10 to 15 per cent since the market peaked. Some of the very high priced properties of £5 million ($6.2 million) or more have fallen by an even greater percentage from peak 2014 valuations, according to anecdotal reports of sellers and agents.
PwC estimated in a report that the number of houses and apartments that were sold in the £1.5 million to £2 million range fell from 2,380 in the nine months to November 2015 to only 1,426 in the same period in 2016. Activity picked up slightly since then according to agents, but is still well down on the previous year.
Surge in stamp duties blamed, but foreign buying down, partly because authorities are demanding transparency from opaque offshore companies
The vast majority of agents, developers and landlords blame the slide in sales volumes and prices of prime London property mainly on a steep rise in stamp duty tax. George Osborne, the previous Chancellor of Exchequer, cut stamp duties for properties under £250,000 to help new buyers, but substantially raised the levels for higher priced property. For the majority of purchases within the London area, the new regime of stamp duties are punitive.
Thus, for example, on apartments of £500,000, the stamp duty is 3 per cent; at £750,000, it rises to 3.7 per cent; then to 4.4 per cent on £1 million; 6.3 per cent or almost £100,000 for properties priced at £1.5 million; 7.7 per cent on £2 million; and 8.6 per cent or £215,000 on apartments and houses of £2.5 million.
Moreover, landlords purchasing new properties and people buying second homes have to pay an extra 3 percent in stamp duty, eg 6 per cent in total for a £500,000 property.
PwC calculates that the slide in the volume of property sales has actually reduced the tax take of the government. Lowering stamp duty would lead to more transactions and boost government revenue and also stimulate demand for decorators, removers and builders, the firm contends.
The property industry is thus appealing to Philip Hammond, the current Chancellor, for concessions in the early March budget. The publication Property Week despatched a petition from 100 companies asking for stamp duty reform.
Poor government policies blamed for property bubbles that hurt young, first time buyers
Housing economists, homeless and other charities outside the confines of the property and building industry have been concerned about property inflation and are thankful that prices have at last peaked. They blame poor housing policies of successive governments.
First, the complaint is that successive governments, Labour, Coalition and Conservatives have built inadequate affordable housing for middle and lower income locals and the growing number of migrants who have gravitated to London.
Second, governments have effectively encouraged property booms to boost the economy and encourage capital inflows. Since the crash of 2008, which was briefly followed by a dip in property prices, the Bank of England’s easy money policies and virtually zero interest rates encouraged wealthy foreign and local buyers to boost property values to heights not remotely envisaged by home buyers and dwellers a decade or two ago. “Help to buy” subsidy schemes of former Chancellor Osborne, also generated speculation and a surge in prices from early 2013 onwards.
Foreign buying has distorted the market, especially London
The vast majority of foreign purchases have been reported as legal. “But a fair proportion” of this buying came from opaque offshore companies, raising the possibility of alleged tax evasion and money laundering, according to the UK National Crime Agency and Transparency International.
“Lack of data means it is extremely difficult to ascertain any links between these companies and any individuals with political influence (Politically Exposed Persons, or PEPs),” said Transparency International in an in depth report. “Research found 986 land titles owned by PEP related companies, although the true number could be much higher. More than three quarters of these companies are registered through either Panama or the British Virgin Islands.”
Transparency International estimates that 44,022 London land titles are owned by overseas companies of which 91 percent are based in Panama or the British Virgin Islands. It reckons that 31 percent of land titles owned by anonymous companies were in Westminster, 16 percent in Kensington and Chelsea and 5 percent in Camden.
The clampdown culminating in the Criminal Finances Bill, has resulted in a sharp reduction in demand for mainly the very high-priced properties. Concerns that bankers will leave London for Paris and Frankfurt after Brexit could be also discouraging buyers from chasing prices.
Prices still too high and need to fall further to generate activity
Despite the decline from their peaks, London prices are still way beyond the affordability of the vast majority of UK residents.
According to the UK National Housing Federation, average house and apartment prices in the greater London area are at £563,000, nearly double the national average and almost 17 times average salaries of £34,000. This means that a household requires an income of almost £130,000 a year, compared with average salaries of £34,000, to obtain a mortgage to buy a home priced at that level, states the Housing Federation.
In prime central London and more expensive suburban areas, very high lump sums and much higher salaries are required. Average prices in Kensington and Chelsea are £1.96 million, Westminster £1.38 million , Camden, including St Johns Wood, Primrose Hill and Hampstead, £1.09 million, Richmond, £780,000 and Islington £745,000.
© copyright Neil Behrmann in The Business Times, Singapore
Neil Behrmann is author of Trader Jack- The Story of Jack Miner and anti-war children’s novel Butterfly Battle- The Story of the Great Insect War