In particular, properties worth less than £1 million have grown by more than any other price bracket, according to the latest London residential review from real estate firm Knight Frank.
The analysis says that this is because it is a market that is less exposed to regulatory change. The series of tax changes in recent years that affect the prime London market adds £30,000 to the current stamp duty rate for a second home buyer of a £1 million property, though this sum would be matched by house price inflation in less than a year at current growth rates.
It is also a market that is less exposed to global economic volatility and more closely aligned with the performance of the mainstream market, where demand continues to outstrip supply on the back of a London population forecast to grow by more than 100,000 every year for the next decade.
Indeed, the highest growth has largely been outside the higher price brackets of prime areas of central London over the last 20 years.
The analysis report explains that changes to stamp duty rates in December 2014 raised questions around the viability of a system that has dampened transaction levels and lowered the tax take in London.
The new rules mean that buyers will pay £153,750 in stamp duty for a property worth £2 million versus to £100,000 before the change. The result is that £1 million plus transactions in London in the first seven months of this year fell 25% compared to the same period in 2014.
A Knight Frank analysis of sales volumes across London local authorities shows the biggest impact has been felt in prime central London. Between January and July this year, the volume of transactions fell 28.6% in the borough of Westminster compared to 2014.
The drop was 27.5% in Kensington and Chelsea and 27.9% in Tower Hamlets, which includes the Canary Wharf district. Accordingly, the total value of transactions in central London has fallen disproportionately.
The report also explains that while a progressively structured tax means more first time buyers and home movers will pay less when they buy a home and there is every indication policymakers are now turning their attention to supply, making sure there are enough new homes to meet demand across London and the rest of the country, the volume of sales only rose in three out of London’s 32 boroughs between January and July 2105 and the value of transactions only rose in 11 boroughs.
As a result, the stamp duty tax take was down 8.7% across London, which included a decrease of 17.5% in Westminster, -33.8% in Tower Hamlets and -19.1% in Wandsworth. The stamp duty take only fell 1% in Kensington and Chelsea due to the impact of the higher rates.
Meanwhile, the combined tax take of Westminster and Kensington and Chelsea represented 11.7% of all stamp duty in England and Wales in the first seven months of the year, an increase from 10.9% in the same period in 2014.
‘It means the government is increasingly reliant for stamp duty revenue on the local authorities where transactions are declining at the steepest rate, which raises questions over the future viability of the new rates. Higher transaction costs have led to a standoff between buyers and sellers in some markets during what is typically a more active time of year,’ the report says.
However, it points out that there are tentative signs vendors are adapting to the new reality and reflecting this in asking prices, though a clear-cut pattern of behaviour has not emerged. Other risks being factored in by buyers include an interest rate rise late next year as well as the wider political backdrop.
‘The London property market is likely to remain a live issue in the run up to the Mayoral elections in May 2016. In this markedly more price sensitive environment, Knight Frank data shows correct pricing is key and properties sell more quickly when the asking price is close the final sale price,’ the report adds.
