Guest Blog: A Bumpy Road for the Luxury Residential Market?

By Paul Rothschild, advisor

We’re seeing myriad headlines extolling a booming luxury property market in the UK. Whether prime regional prices increases by 8.5 per cent year on year, or sales of London mega-mansions proving that the wealthy are flocking back to the luxury market, there is much positive sentiment.

According to Savills, prime regional markets that have long been far behind London are catching up thanks to the fastest growth in a decade. Demand comfortably outstrips supply across the country, and, away from the UHNI housing choices, average prices have also been rising to £261,743.

What’s driving the booming luxury market?

During the height of the pandemic, only the most exclusive and largest properties, complete with substantial gardens situated in west and southwest London, were matching regional luxury markets. Travel restrictions and lockdown measures understandably held back prime properties in central London.

However, prime single-family properties in London increased in price by 4.3 per cent. Apartments in central London, on the other hand, experienced a 0.6 per cent decline year on year. With no garden or outside space, prime residential properties dropped in value by 0.9 per cent, while those with large gardens increased by 6.2 per cent.

The most in-demand properties for the luxury market are on the coast. Luxury coastal properties and country houses worth in excess of £2 million demonstrated an average price growth of up to 14.6 per cent.

Luxury buyers are largely unconcerned about the tapering off of the stamp duty holiday first introduced in July 2020 to boost the economy. This has a greater impact at entry and middle levels of the property market.

Tax breaks, the search for space and remote working major drivers

Buying demand hasn’t just been motivated by tax breaks. While some anticipated a quieter first half of 2021 due to prolonged uncertainty, this is far from the case. The combination of COVID-19 restrictions easing, the competition for more space and general relocation from city to countryside have combined to create this extraordinarily busy market.

And as we move into the second half of 2021, there are clear signs that the world’s wealthiest people are looking for opportunities after a long year of lockdowns and COVID-19 restrictions.

Between November 2020 and April 2021, £817.4 million was spent on high-end luxury central London property. Luxury developments continue apace in London, and both Knight Frank and Savills predict that prime central London property values will rebound by 7 per cent by 2022 and return to peak values by 2026.

What these reports do not highlight are the market risks which could derail these forecasts!

Why it’s time for caution for the whole housing market
Investors and interested buyers would be forgiven for thinking that the housing market, both luxury and the broader market, is in a continuously buoyant state with a bright future.

And while there are undoubtedly deals to be done, time to urge caution on this housing bubble. Mortgage holidays, the lengthy stamp duty holiday and lower mortgage rates have got us here, but the UK is soon due for a significant correction on house prices.

As we move away from the pandemic, the impact of falling wages and the fallout from Brexit could combine to cause a crash. Whether this happens largely depends on the level of demand. Should it continue to rise, the market could stay intact. However, should demand begin to drop we’ll see a correction that could easily spiral into a property crash.

Leading economists have raised concerns that there is a certain level of denial within the market, with homeowners remaining unconcerned. This, they say, raises comparisons with the property crash of the 1990s.

Should Brexit lead to an economic recession further down the line or the economy slows down for a lengthy period, then the housing downturn will last longer. There is a danger of the end of furlough and other Government support put in place for the pandemic impacting this too.

Luxury prices are rising but the majority is starting to fall

It’s also worth noting that while luxury property in London is faring better, 75 per cent of properties sold in the city in May 2021 went for less than their original asking price but then this was followed by a slight decline in June. This is according to the Council of Mortgage Lenders.

These mixed reactions to prices are failing to penetrate into the psyche of most homeowners. Mortgage rates remain low and a Halifax shows that 58 per cent of homeowners fully expect prices to rise further, with only 14 per cent expecting a fall.

With 11.1 million mortgages right now, totaling more than £1.3 trillion in loans, it’s unsurprising that people don’t want to consider a market correction. The media representation of Brexit and inflation fuels this group optimism. Given that there have been doom-mongering predictions in the headlines since the Brexit vote, conversely, in some cases they have given a false sense of security as the worst has not happened.

This could be feeding into a feeling of optimism in the wake of such a difficult 18 months that isn’t necessarily reflected by reality. Despite signs that prices are, in fact, beginning to fall in real terms, the increase of inflation and the corresponding fall in wages, this isn’t yet being accepted by the majority of homeowners.

A false sense of confidence in the value of one’s property can lead to higher values being put on it without cause. Properties are generally the most expensive asset that most people will ever own, and it’s natural to want to believe that it will always appreciate in value regardless of external considerations.

This emotional bias towards home ownership can then lead to financial decisions that ultimately damage the homeowner. These include releasing equity with abandon or leveraging an enormous mortgage for the family home.

It’s important for homeowners at all levels to be aware of the realities of the situation we find ourselves in and be prepared. Reducing exposure to risks should be a priority as well as sensible investment diversification. Above all, we need to remember past housing price booms and the crash that followed and apply these lessons to the near future.

The most important tip I can give to all property investors and owners is to ensure they have some protection against a market correction or crash. Ensure you have access to sufficient cash to fund all your expenses for a minimum period of two years, otherwise now is not the time to increase your financial commitments but an ideal time to find a way to reduce them.