London Property Market: What Goes Up...?

Expat Briefing Editorial Team, 01 February, 2016

London. It's not only the United Kingdom's capital city, but the world's second largest financial centre, and a world city, and lots of people want to buy property there, either as a home or an investment.

Consequently, London real estate prices have been surging year after year, with little sign of a slowdown. That is, until recently, according to some reports. So are we about to see a correction in the London property market?

Property Vision, a home buyer advisory business, suggests that the accumulation of tax and other measures announced by the Government in recent years in an attempt to put a brake on the market may be beginning to have an effect.

"The list of blows to the market is impressive: Stamp Duty (SDLT) changes, Enveloped Property tax, Non-Dom reform, Buy-to-Let taxation and the Mortgage Market Review," the company observed in its market round-up last November. "That the market hasn't fallen over in the face of all these hammer blows is remarkable. It certainly is weak at the knees with turnover down about 30 percent compared with last year."

Property Vision points to what it believes is a telling statistic from the week beginning October 9, 2015, a week in which there were 180 new instructions in Prime Central London, 24 sales, 95 price reductions, 23 fall-throughs, and 45 market withdrawals. "The fall-throughs are interesting," the firm observed. "If our experience is anything to go by, this is down to extreme risk sensitivity – any minor glitch in the conveyancing process is an excuse to pull out – and financing problems."

Yet, the conclusions of a number of recent surveys are saying that there is plenty of life left in the London property market yet, as well as that of the south east of England, which has been equally as strong since the crash.

A report by the Royal Institute of Chartered surveyors (RICS) has predicted that house prices in London, the South East and East Anglia look set to rise by a further 5 percent per annum in each of the next five years, compared to a UK average of 4.5 percent, despite offering the poorest value for money in the UK.

However, RICS also found that there has been a recent spurt in demand caused by an announcement by the Government in November's Autumn Statement that SDLT will increase by 3 percent on buy-to-let properties and second homes from April 2016. Since then, 16 percent more chartered surveyors reported a rise in new buyer enquiries.

"The housing market has experienced an unusually buoyant December," said RICS Chief Economist Simon Rubinsohn. "Those in the industry have been speculating that this is the result of the Chancellor's announcement last November. Potential buy-to-let investors are looking to pick up properties before the increased stamp duty levy comes into force next April. If that is the case, then we can expect to see the housing market heating up further over the next few months."

Certainly, there appears to be plenty of demand in London for rental properties, according to a recent report by estate agents Martin and Co, which has 25 offices in the London area.

The number of tenants registered for each property offered by Martin and Co rose from 7.5 at the start of the year to 11.8. This high demand for rentals is translating into strong support levels for rental incomes the firm said, with the London average growing 5.7 percent to give a range of rental yields from 2.3 percent to 6.4 percent on a typical two-bedroom flat and an average rental yield across the capital of 4.3 percent.

Healthy rental yields in London are also helping to sustain demand for buy-to-let purchases among the expat community, despite recent changes in the tax treatment of expat buy-to-let portfolios introduced in April 2015, says Offshoreonline, the expat mortgage brokers, which is continuing to report strong interest in expat mortgages.

"Rental yields at this level mean that expat buy to let landlords can potentially see a profit on their rental activity alone, even before any possible growth in house process is factored in, as variable rate expat mortgages are available from 3.53 percent to 3.69 percent, depending upon the deposit the expat buy to let landlord is happy to contribute," said Guy Stephenson, a spokesman for Offshoreonline.

Homeowners themselves are confident that prices will continue to rise, according to Zoopla's latest Housing Market Sentiment Survey, which was published at the end of October 2015. The survey of almost 5,000 homeowners nationwide found that 92 percent anticipated that prices in their area would rise in the forthcoming six months – a steady increase from the previous year when only 88 percent were confident.

The East of England had the highest percentage of optimistic homeowners, with 97 percent expecting the price of property in their area to rise over the coming six months. However, homeowners in London and the South East were almost as confident, with 96 percent of respondents across those regions expecting price appreciation.

Zoopla reported a more mixed picture with regards to homebuyers' experiences of obtaining mortgages since the Mortgage Market Review (MMR), which tightened lending criteria considerably, was introduced in April 2014. As Lawrence Hall of Zoopla observed: "The only slight chink in the armour is the fact that a sizeable number of people still feel securing a mortgage is becoming more difficult, despite the fact that the MMR was implemented with consumers' best interests at heart. It could also be an indication that the supply of low mortgage rates that have flooded the market of late could be about to reduce as lenders try to pre-empt the Bank of England's movements regarding the Base Rate."

Nevertheless, as far as London is concerned, data from the UK Land Registry is reflective of a market that continues to motor on apparently unchecked. The figures show that in December, London experienced the greatest year-on-year increase in its average property in 2015, by 12.4 percent, almost double the rate of other UK regions. London also experienced the greatest monthly growth in the UK, with an increase of 2.1 percent. The average price of a London home in December was GBP514,097, more than GBP10,000 more than it was in November.

Yet, there are some underlying forces at work that, when viewed against market data, are producing some conflicting signals for homebuyers and investors, including recent and upcoming tax measures, restricted access to finance in the UK, and general pessimism about the global economy.

However, London has long seemed immune from external forces. And ultimately, perhaps the factor underpinning London's sky-rocketing property prices is the simplest law in economics: supply and demand. The city's current housing stock is already inadequate to meet the city's needs, and the London Assembly predicts that London's population will increase by one million in the coming decade. This means that an additional 49,000-62,000 new homes will be needed every year, but there is only enough space for a maximum of 42,000 new homes per year to be built.

Some commentators opine that London's property prices are unsustainable, and that the market is bound to correct sooner or later. However, in an era of historically low interest rates and uncertain equity markets, the returns on investment continue to look very attractive for those that can afford a piece of the London action.

Tags: business | interest | Tax | Invest | economics | Expats | Offshore | investment | United Kingdom | law | tax | stamp duty |


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