What a weekend! The early signs across all markets are very positive on the back of the General Election Results. FTSE 100 up 2.6%, Bank, Construction and Property stocks up, yields on UK 10 year tighter by 10bps and Sterling Euro also up 3%. Clearly, business welcomes a majority Conservative government, but not as much as homeowners in Prime Central London! No more Mansion Tax, no rent control and the “non-dom” status remains protected. So far so good. However, taking a longer term view on property, we remain optimistic but cautious.
Strengths:
London is the financial centre of Europe and this coupled with perceived political stability and a more certain tax position over the next 5 years, makes the Capital an attractive place to live. The uncertainty over the Euro has driven and continues to drive people to London; and the Capital is also seen to be a safe haven for Middle East investment. We are also expecting further investments from Chinese and Indian investors. Further, a shortage of property and an expanding population will together continue to push prices higher due to lack of supply.
Weaknesses:
Our major concern is the twin Budget and Current Account deficits together just shy of 10% of GPD which is high compared with Japan (8%) the USA (5.5%) and the Eurozone (close to zero). Granted, we have had 9 consecutive quarters of strong expansion (save for the last) however The Government now needs to focus on reducing these deficits as they have an impact on inward investment and confidence .A combination of higher interest rates in the USA and an unchecked balance of payments deficit here might lead to higher mortgage rates. This in turn could impact house prices which would be mitigated however, by the low leverage which prevails in Prime Central London
Opportunities:
A recent Prime-Resi poll of leading agents suggests an average price increase of 2% across Prime London property prices this year and potentially up to 5% per annum to 2020. The same poll also suggests a 3% increase in rental prices. We do not think that there are enough data to back up these figures, particularly as the poll was taken prior to the Election but we are overall cautiously optimistic. One reason is Stamp Duty: The Office of Budget Responsibility (17th March) has revised downwards the revenue receipts expected from Stamp Duty by £600mm to May 2015 and £1.7bn 2015-2016. Under the old Stamp Duty regime, property sales over £2mm accounted for 17% of the receipts whereas under the new slab system, this now rises to 30%. However the volume of transactions over £2mm have fallen just under 20% year on year to Jan 15. We wonder if the Government might lower stamp duty in order to stimulate more receipts for the Exchequer resulting in higher volumes at the top end of the market. We have seen the effect of cutting the top rate of income tax from 50% to 45% - could the same logic be applied here? The 12% was a political move to derail Mansion Tax. A revision to 10% may well recover some of the lost tax receipts.
Threats:
The single biggest threat we can see is from an increase in interest rates. There is still leverage in the Central London housing market (outside Prime Central London) and many homeowners who took out a 2 or 3 year fixed rate mortgage are now looking at a potential move to standard variable rate. Whilst the Mortgage Market Review has imposed rules on income multiples and LTV levels, the majority of existing mortgages were not issued under those rules. Consequently a 0.5% increase in base rates on a £500,000 mortgage would result in an effective 12% increase in annual mortgage payments (1). Whilst this may not affect Prime Central London property, the cumulative effect of possible negative equity and the inability to refinance due the MMR, may permeate into the Prime Central market
We are also concerned about and EU and Scottish Referendum and effect on Sterling. However for overseas buyers of Prime Central London property, a weaker Pound does make the housing market more appealing, provided they are not looking for a quick turn. For those who have already acquired property, an increase in house prices will go some way to off-setting any currency losses they may have made as a result of, for example, a weaker Euro.
Conclusion: Cautious optimism.
In summary, Maskells Estate Agents believes that we will see Prime Central London prices increase over the next 8-12 months by over 2% but to give an exact percentage today would be futile – there are still too many variables including an upcoming Budget. We believe that transaction volumes will certainly increase in the near term and if Stamp Duty is cut to 10% we expect more liquidity, better confidence in pricing and more confidence generally in the market. Recently we have seen increased activity following the General Election including transactions which were dependent on a Conservative win, now being agreed but a levels generally below the advertised asking price. Vendors who have been struggling over the past few months still need to be cautious and moderate their expectations: for the time being, the market has shifted in their favour but buyers are still very price sensitive.
To Contact our Team please call Jamie (Sales) or Peter (Lettings) on 0207 581 2216 or by email
jamie@maskells.co.uk peter@maskells.co.uk
About Maskells:
Maskells, established in 1965, is Chelsea’s oldest independent Estate Agents. With multi-lingual staff and a full Sales and ARLA registered Lettings business, Maskells gives you access to an unrivalled depth of property expertise, experience and local knowledge. Our Agency offering and post transaction services, via concierge sister-company White Circle Collection, provide a one-stop solution for all Prime London Property requirements.