Price Changes
We believe that current asking prices are potentially already 5% over where they should be and yet vendors have been surprised by how quiet the market has been. With a lack of transparency in pricing, driven by low volumes, vendors will seek to keep asking prices high however those who actually sell may find themselves accepting 3-5% less than anticipated. As such we believe that asking prices in 2016 will be flat to 2015 with achieved prices 3% lower with stamp duty being the driver of that outcome. We do however believe that London remains competitive on the world stage, where transaction costs in both Hong Kong and Tokyo are over 13% and as high as 22% in Belgium.
Acquisition costs in NY are also very high (driven by large broker commissions). What London offers is competitive transaction costs, very low property tax (our council tax which is not really based on property value, rather low property bands) and no capital gains tax on the sale of the primary residence. Once buyers comes to terms with this, then we expect above inflationary price growth to return.
Outperforming Areas
All of Prime Central London (PCL) is potentially poised to out-perform at all times. In a falling market, the lack of mortgage debt in PCL produces very few forced sellers meaning prices remain relatively stable with low volumes. In an growth market, PCL attracts international money which emerging PCL does not – and with limited assets available in PCL, the price on any property can increase based on simply 2 buyers bidding for it. In a flat market, as we are in at the moment, PCL remains a buy-and-hold investment vs some of the more high-yield high volatility areas.
In emerging PCL, we have seen significant activity in South West London since 2013 driven largely by increased mortgage debt in to the area. This growth has now slowed down as the Mortgage Market Regulation income multiples and LTV ratios provide a regulatory cap on price growth. The Price Income ration provided by the GLA shows areas where value remains based on the median inner London salary of £34,500.
Taxes
More activity in the sub £2m market and a lot of headaches in the £20m+ market, particularly for those buying via corporate or overseas structures where Additional Stamp Duty, ATED and domicile status are increasingly important.
A £5m house will today attract £513,750 in stamp duty vs £350,000 under the old system, a difference of £163,500. With core inflation running at 1% you now in theory will need to spend an additional 3.2 years in your property to allow for inflation to absorb the value of the increase. None of this is particularly problematic as most families will tend to move every 7-10 years. The problem however is finding the additional £500,000 up front from net income to pay the tax on completion. So the impact is one of longer term ownership.
Developers are now looking at cheaper properties but were caught, as everyone was, quite unprepared for the SDLT increase which made many projects unsaleable and now with an additional year of interest paid on their construction loan, unviable.
In the government’s Autumn 2015 Spending Review a 3% tax on buy-to-let homes and second home purchases was announced, coming into effect in the UK from April 2016.
Overseas buyers
We expect the Chinese market to remain important to the New Home sales in London and we are seeing, in the later part of the year, an increasing number of French looking again. We are also beginning to see the return of the young professional American bankers / lawyers looking to initially rent and then to buy. However a recent sale had 50 viewings where 70% of the applicants were domestic. We do expect continued interest from the domestic market in PCL, particularly growing families seeking to settle down into a family home for the next 10 years or more.