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Slower year ahead for prime property market in central London

Prime property prices in central London have bucked the trend of the wider housing market in the UK over the past few years, bouncing back 50% after the post global downturn crisis trough to reach a new high.

Last year Knight Frank forecast another year of growth and indeed the level of growth exceeded expectations for a 5% rise in values in 2012.

According to Liam Bailey, global head of residential research at Knight Frank, the demand for luxury London homes from overseas buyers looking for a safe haven for their money, as well as a slice of London life has helped drive price increases.
‘The weakness of the pound makes the investment even more attractive, particularly for those buyers who have currencies pegged to the US dollar,’ he explained.

He pointed out that this growth might have continued into next year, albeit on a more modest basis as prices bumped a ‘natural ceiling’, but UK government policy is set to have an impact on the market in 2013.

Factors include the increased stamp duty charge for purchases of homes worth more than £2 million, up from 5% to 7% and for those buying through a company structure, the charge has increased to 15%.

Bailey explained that, crucially, the government also announced a consultation on further charges for those buying through a company structure of an annual charge of up to £140,000 a year, as well an extension of capital gains tax.

‘These measures will not be confirmed for a few weeks yet but they have created an air of uncertainty among buyers who own property in a company structure, or who were considering buying a property in this fashion,’ said Bailey.

‘As a result, there is an air of wait and see in the market, and this has had an impact on transactions, with £2 million plus sales volumes down by 25% year on year in the three months to the end of October 2012. If the measures are introduced as laid out in the government’s consultation, we expect to see a significant proportion of property owned through companies switched into private ownership, either in a single name or a trust structure,’ he explained.

‘Some property owners may put their home on the market, but some buyers will continue to buy and hold property through a company structure because it suits their needs. We will revisit our forecast in the wake of the announcement if the government decides to bring different rules forward,’ he added.

Also affecting this sector of the London property market is the continued on/off discussion about a so called mansion tax. Proposals have included an annual charge on owners of property worth £2 million plus and the introduction of extra council tax bands for properties worth £1 million or £2 million.

‘The housing market can absorb change, but long term discussions create uncertainty, which can be the most damaging factor of all,’ added Bailey.

Knight Frank forecasts that prices in prime central London will remain unchanged overall in 2013 before more moderate price growth is seen once again from 2014 onwards but Bailey points out that there is likely to separate sectors of the market that perform at different speeds because of the new stamp duty rules.
 
‘As might have been expected, price growth in the £2 million to £5 million band slowed in the wake of the introduction of the new rules last March, while price growth and market activity in the sub £2 million band flourished. We expect this to remain the case, and this trend will also have a knock on effect in prime outer London, where many family homes fall into this sub £2 million category,’ said Bailey.

Knight Frank is not the only property company to forecast a year of no growth in this sector. A few days ago the latest report from Savills said that it expect growth in this sector to hover around 0% in 2013 before renewed growth from 2014 and growth totalling 25.6% by 2017.

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