Election uncertainty and higher taxes affecting prime London property market

Higher taxes and election uncertainty have put the brakes on prime London house prices which fell by 0.5% in the first quarter of 2015, new research shows.

This follows an average 2.6% downward price adjustment in the final quarter of 2014 that was triggered by the stamp duty reform announced in December’s Autumn Statement, according to the analysis by real estate firm Savills.

It means that the 12 month rolling average for house price growth in the prime London market has now slipped into negative territory.

‘As we forecast in November, uncertainty regarding the general election and the potential for further taxation of high value property have contributed to a subdued market in the first part of 2015,’ the report explains.

‘The prime central London housing markets, that have been most affected by increased stamp duty charges, are looking fully taxed. This has meant sellers are typically having to factor in price adjustments equivalent to the stamp duty increase. Consequently, in central London values are down 4.3% year on year,’ it adds.

The study shows that the markets of prime south west London have been similarly, but less significantly, affected. Buyers have become increasingly aware of the high cost of moving, which has tempered demand in the higher value parts of that market. By contrast, the markets of Islington, Wapping and Canary Wharf continue to show positive annual growth, despite a general sentiment-led easing in values in the past six months.

‘In part, this reflects the fact that lower tiers of the prime market have remained the most robust, with the market below £1 million generally benefiting from the stamp duty changes and unaffected by the political focus on taxation,’ Savills says.

‘Interestingly, the softening in the London markets has corresponded with a pick-up in the number of Londoners circling the country market. Prices of homes below the £2 million threshold in the prime regional markets beyond London continue to show year-on-year price growth, and rose by 1.1% in the first quarter of the year. However, market activity beyond London is still partly constrained by pre-election caution,’ it points out.

‘While the fundamentals of demand and supply remain sound, the short term outlook for the prime property market is heavily dependent on the extent to which the election brings political certainty and whether the sector is subject to further taxation. Certainty will, at least, allow buyers and sellers alike to take account of the impact of any fiscal change, as the all-important autumn market approaches,’ it adds.

Savills is forecasting that prices in the prime London market will rise by 22.7% over the five years to the end of 2019 assuming no further taxation of high value property. In this case there would be a relatively swift bounce back in values as was seen in 1998 and 2002, when price falls in central London were contained to less than 5% and recovered lost ground very quickly thereafter.

In the event of a mansion tax, Savills is forecasting that prices in prime London will rise by a net figure of 15.9% over the same five year period, with the strongest growth in the markets below £5 million where any charges are expected to be least aggressive.