Charles Curran, Principal and Market Analyst at Maskells looks to future developments in the Prime London property market.
Which areas of Prime London will hold up the best in the next few years?
Charles Curran: “The areas which will perform the best are those where the prices have not been overtly reliant on an increase in mortgage debt. In short, certain postcodes within the Prime London market have seen marked increases, that are visible in estate agents’ windows. However, behind this for some of those properties there has been a marked increase in the debt balances; for example in parts of London SW8, we have seen house prices increase by over 20%, whilst the debt balance of the same postcode has increased by over 30% in the past few years.
As and when mortgage interest rates increase (which are de-linked from base rates as we saw when Halifax Bank increased their tracker rate by 0.25% when the BoE cut their base rate by the same amount), debt payments will rise. According to the CML, interest and capital repayments now account for approx. 20% of the assessed income on mortgage applications (interest only accounting for 11%). If rates were to double from say 1.5% to 3%, we could expect a similar increase in mortgage payments as a percentage of income.
Consequently, this may make some mortgages unaffordable and produce forced selling, creating pressure on prices in that area.”
What will get potential buyers actually BUYING again?
Charles Curran: “Buyers like confidence and with market transactions slowing, there is very little confidence in pricing (even with the reductions we have seen over the past four to five months). Why is the market slowing? Brexit was a shock, but it was really the catalyst to an existing underlying problem of very high transaction tax (SDLT). In the low yield environment that we find ourselves, in Prime London, SDLT can account for the equivalent of four to five years of rent on a similar property which applicants are looking to buy. If one is not confident in pricing, renting has become a way of overcoming that concern. Nevertheless, the tax consideration on gross rental income and the upcoming removal of mortgage interest rate relief on BTL properties may well change this; meaning it becomes less efficient to rent out your property and with the income rent something else. This has hit growing families hard.
The only way the Government is going to solve this problem, and allow people to move around the country for new jobs, schools, opportunities or to simply provide suitable accommodation for a growing family is to greatly reduce SDLT, in order that it makes sense to buy rather than rent, freeing up rental stock for those who are struggling to get on the housing ladder.
The current SDLT regime has blocked the market at the higher end, meaning that for would-be sellers whose children have left home and are seeking to downsize cannot find buyers (as often the lion’s share of their wealth is in their house and they need it for retirement) and those seeking to upsize and thereby free up cheaper property, cannot move due to a lack of stock and high transaction costs.”
