3 April Market Overview March 2017 – How will Brexit affect property prices?
Now that Teresa May has finally triggered Article 50, Brexit has been brought sharply into focus its effect on property prices and in particular on the capital.
Much has been written about the effect of Brexit on property prices. It is important to distinguish between different market – firstly prime central London (PCL) covering the golden post codes such as SW1, SW3, SW7, W1, W2 and W8, with an average property price of approximately £1.8 million. Metropolitan London where the average property price in the capital is £474,000 and the United Kingdom where the typical house price is £217,000 (Office of National Statistics).
Brexit needs to be considered against wider taxation and regulatory backdrop.
There is no doubt that PCL prices have suffered as a result of successive increases in Stamp Duty, the additional stamp duty rate of 3% on buy-to-let and second homes, reduction in the offset of mortgage interest from rental income for rental investors and the recent introduction of capital gains tax and inheritance tax for foreign owned properties. In the year to December 2016, Knight Frank have reported that averages prices in prime London fell by 6.3% annual residential growth in December. This masks wide variations between different boroughs and also between flats and houses. As a general rule of thumb, the higher the value the bigger the discount in prices.
This should be contrasted against average UK house prices. Halifax reported in February that annual growth in the three months fell from 5.7% from 6.5% in the three months to December. Nationwide reported that houses prices grew by 4.3% in January. However, whilst growth is falling, it is still in positive territory contrary to some popular opinion. It is also worth noting that with the exception of buy-to-let properties, stamp duty has fallen for properties worth less than £925,000.
Now considering Brexit, there are both positive and negative risk factors for the property market.
On the negative side, there is the potential of relocation of city institutions and EC residents out of London if financial passporting arrangements cannot be agreed, a negative impact on the London economy through lower trade with Europe, higher bond yields and rising inflation from higher import costs which may lure investors out of property. However, currently property offering gross rental yields in prime central of approximately 3% is an attractive alternative to cash.
On the positive side, interest rates are likely to remain lower for longer, which is very supportive of the market, sterling is likely to remain weak, which boosts foreign investment in the market particularly in PCL, a continued perception that London property is a safe haven given the political and economic uncertainty in Europe. Lack of certainty regarding Brexit has contributed, along with increased property taxation, to a sharp fall in supply levels. In dollar terms PCL prices have fallen 20-30% since 2014, which highlights the attraction of the capital to foreign property investors (Lonres and LCP). It should also be noted that sales volumes have hit an all time low with a 29% fall in volume over the previous year. The vast majority of Owners of PCL are not forced sellers and can simply hold their assets.
It is interesting that house builder’s prices which slumped 37 percent in the days after the Brexit vote are now 15.6% below pre-vote levels (FT).
For most of the country, Brexit will have little impact on house prices. In much of the UK, homebuyers are moving because they need to because of jobs, an expanding family, downsizing or changes in circumstances.
The main Brexit risk is to London as the financial centre with most to lose from exiting the EU. The original doomsday predictions from some of the remain politicians of a 30 percent reduction in house prices now seem very wide off the mark.
Many of the leading commentators are predicting prime London prices to remain flat in 2017 and 2018 with a 5-year forecast of capital appreciation of 15% (Savills research). We agree that prices will remain broadly flat in the next 2 years followed by price appreciation once Brexit negotiations are clarified and recent property tax increases are absorbed into the market.
At Walton Estates, we have seen a strong level of interest from foreign buyers. Recently we were instructed as sole agents on a block of flats in Chelsea. With pro-active and targeted marketing, we have attracted multiple bids and the sale is now agreed. Our new instruction last week in Pelham Court has also a flurry of viewings within a week of coming to the market. We predict a gradual increase in sales volumes after the initial shock of Brexit and Stamp Duty reforms and remain cautiously optimistic about the market. This was borne out by a recovery of sales volumes in the last quarter of 2016.
Interested in selling your Prime Central London property? Please contact Simon on 0207 581 4540 or email email@example.com. Alternatively, please click here to visit our on the market properties page.