Residential Property Focus

Residential Property Focus
 
Prime's period of convalescence

3 November 2016, by Lucian Cook

Taxation and caution during the EU negotiations will hold back the market until 2019

 

If the UK’s prime housing markets were compared to an ailing patient, we would probably say they have been afflicted by a bad case of over exposure to taxation complicated by Brexit-induced malaise.

To pursue the analogy, there may be a little more pain to come. But after a reasonable period of recuperation as the UK negotiates to leave the EU, we fully expect their health to be restored.

FIGURE 4

Key drivers in the prime housing market

 
Key drivers in the prime housing market

Source: Savills Research

Referendum run up

Prior to the decision to leave the EU, the prime housing markets of London, in particular, faced a number of challenges. Historical price growth had left them looking expensive. Successive increases in stamp duty had substantially added to transaction costs. The tax environment for overseas buyers was fast becoming less hospitable. It had become more difficult to borrow against less generous city bonuses. Buyers had become a lot more cautious.

In the prime housing markets across the rest of the country stamp duty costs above £1 million were impacting on demand. But generally the issues affecting London were less of a concern.

In Scotland, where the snappily titled Land and Buildings Transaction Tax created a bigger tax burden than Stamp Duty Land Tax, the impact was more keenly felt. Still, compared to London, prime property in the regions looked relatively good value.

Experience to date

So the vote to leave the EU came at a difficult time. Caution has fed into an underlying lack of urgency among buyers.

In the capital it has meant prices have continued to adjust. For overseas buyers the temptation of a currency play on the back of a fall in the value of the pound, has been offset by the changed tax environment.

It has also meant price growth has been put on hold for prime country houses and high value property in urban areas such as Bath, Oxford, Cambridge, Cheltenham, Chester and York.

Autumn Adjustments

As we look forward, sentiment in these markets will be determined by the perceived impact which the Brexit vote will have on the economy and the prospects for wealth generation. This is likely to be dictated by how the negotiations to leave the EU proceed. Inevitably it will ebb and flow. In the short term, the temptation for buyers to sit on their hands until they believe that property represents identifiably good value, is likely to mean further price adjustments in London.

The need for further price falls beyond London is less obvious, though the prime regional markets are likely to become more needs-based. There are, of course, exceptions to every rule. Short-term price adjustments cannot be ruled out in more volatile niche markets, such as the private estates of Surrey and Berkshire.

Similarly, sectors affected by the additional 3% stamp duty, such as the coastal second home markets of the South West and East Anglia, are likely to remain particularly price sensitive.

 

 
Prices continue to adjust in London

▲ Prices continue to adjust in London

Put on pause

As negotiations to leave the EU proceed, it is difficult to see any sustained upward pressure on prices across the prime markets. Nor is there likely to be sustained downward pressure on prices, not least because of the prospect of ultra low interest rates. Throughout this period of convalescence we expect demand to be strongest for property which is best in class.

For those prospective buyers taking a medium to long-term view on prices, the key question is what happens next?

Return to growth

For London, much depends on the extent to which the UK capital retains its status as a global financial centre and world city. The loss of some jobs to other European cities is inevitable, though we expect this to be limited.

The UK Government will undoubtedly seek to protect the status of the City of London. It will do so in the expectation that EU regulations, due to come into force in January 2018, will strengthen its hand. Additionally, a lack of viable alternatives will work in London’s favour.

This indicates the prime markets of London will return to growth as the uncertainty clears. It may not be the kind of double-digit growth that we have seen when markets have bounced back in the past, given the changed tax environment. Instead, we expect it to be more in line with the long-term average.

This is likely to support a pick up in the prime regional markets. A renewed flow of buyers into key commuter markets is expected to combine with a more general improvement in sentiment as buyers realise that they cannot put major financial decisions, and their lives, on hold forever.

FIGURE 5

Prime markets: Five-year forecast values

 
Prime markets: Five-year forecast values

*NB: these forecasts apply to average prices in the second hand market. New build values may not move at the same rate

Source: Savills Research

RELATED CONTENT: For more information see Prime London Residential Markets Q3 2016

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