Price adjustments needed to rebalance post Brexit prime London

Price adjustments are needed to rebalance the prime property market in London after the decision by the UK to leave the European Union with values set to fluctuate for next two years.

A new analysis report from real estate firm Savills says that the uncertainty in the market is not just down to Brexit but also successive tax rises and these combined will delay the sector’s return to growth.

The firm anticipates that the city’s highest value homes market will continue to adjust throughout 2016. Value fluctuations are then expected to hover around zero for the next two years as Brexit negotiations play out, before returning to capital growth in line with the long term trend in 2019.

The report points out that prime central London markets, where values average around £4 million, have been most impacted by changes to stamp duty since December 2014. Prices were some 8.1 per cent below their 2014 peak by the time of the referendum, including falls of 2.2% in the first six months of this year.

As a result, Savills believes that further price adjustments in the order of 6% or 7% will be required to secure sales as buyers wait to see how Brexit negotiations proceed, and the impact on the UK and London economy becomes clearer, although the currency play is a clear boost to international buyer interest.

Prime central London values are therefore now expected to close 2016 down 9% and then stabilise for the next two years. A return to growth in 2019 is forecast, with total growth of 21% in the five years from 2017 to 2021.

The lower value, more domestic outer prime London markets, where the average house price is £2 million, were less impacted by the December 2014 stamp duty increases and values rose 2.3% in 2015, the report says.

However, a further 3% surcharge on additional homes combined with pre-referendum uncertainty to suppress growth in the first six months of this year and contributed to reduced fluidity in the market.

Total price falls of 5% are forecast for outer prime London property market in 2016, with lower total five year growth to end of 2021 of 14.6%, reflecting mortgage lending constraints and greater caution around financial sector job security.

‘The market will inevitably remain susceptible to fluctuations in buyer sentiment, but there is nothing to suggest the impact of the vote to leave will echo that of the global financial crisis,’ said Lucian Cook, Savills UK head of residential research.

‘The summer market was slow but certainly not moribund, and the currency advantage brought international buyers back into the market. We now need further small adjustments to bring buyers back to the table in greater numbers and early signs from the autumn market are that committed sellers have adjusted their prices by between 5% and 10%,’ he added.

Cook explained that the current situation is reminiscent of the 2002 to 2004 post bull run period when a less significant financial shock combined with an uncertain geopolitical backdrop. Prices then fell a total of 10%.

He believes that there will be opportunities across the prime London market for those prepared to take a medium term year view, but it will require sellers to recognise the subtleties of a market that is likely to distinguish between the very best stock in the best locations and the rest.

‘Looking further ahead, we know the prime London markets have generally rebounded strongly after a period of adjustment. While the tax backdrop will continue to be factored into buying decisions, no other European city has the infrastructure to match London as world city and global financial centre and this should underpin a return to trend levels of growth,’ Cook concluded.