Prime central London residential property prices rose 0.7% in April, and have been rising now since November 2010, the report reveals.
It says that much of this rise is underpinned by the demand from overseas buyers who accounted for 52% of all £2 million plus homes sold in the sector between March 2012 and March 2013.
‘With the pound entering a renewed phase of weakness we have examined the impact of currency arbitrage in our summer review of London’s prime residential market. In the report we provide a detailed assessment of recent and future implications on relative pricing for international purchasers,’ said Liam Bailey, global head of research at Knight Frank.
‘In sterling terms, property prices in prime central L now stand 17% above their previous March 2008 peak. However, taking into account currency fluctuations, prices for prime London homes for individuals purchasing in US dollars are 11% below their March 2008 level,’ he explained.
For euro-denominated buyers, prime central London homes have risen 9% since 2008. Bailey said that as the US emerges from the recession in better shape than most developed economies, the dollar is expected to benefit. A string of upbeat economic data and an anticipated end to quantitative easing should ensure the dollar continues to strengthen against the pound and euro over the next five years.
‘Indeed, our research, which takes into account EIU currency forecasts and our own predictions for prime central London property, shows that by 2018 prime central London property prices will have risen 20% in US dollar terms. In contrast, prices will rise 26% in GDP terms,’ Bailey pointed out.
‘As a result, entry to the prime central London property market will become more affordable for dollar denominated buyers and for those whose currencies are pegged to the US dollar,’ he added.
The report also looks at the impact of the £2 million tax regime, including the 7% rate of stamp duty, which was introduced in March 2012 on the prime property market.
Transaction volumes in the 12 months to the end of March 2013, show that the £2 million plus market was hit hard by the uncertainty over associated changes to annual charges and Capital Gains Tax.
But following clarification on the detail in December 2012, the market emerged much more strongly in the first quarter of this year and the sub £2 million bracket benefitted at the expense of the bracket just above £2 million.
‘Our view is that over the long term the impact of the new 7% rate will be to reduce transactions in the £2 million to £3 million bracket by around 5% below the level they would otherwise have been,’ said Bailey.
‘The interesting finding is that, all things being equal, the impact of the tax change appears to fall off to almost zero above £3 million. This does not mean there aren’t real risks from additional political and tax activism targeted at the prime market. But, for the moment at least, there has been sufficient momentum in the market to keep transactions, largely, on track,’ he explained.
As far as international buyers are concerned, Bailey concluded that ‘an appetite for tangible
investments, ultralow interest rates and a weak pound help make up the perfect ingredients for that heady cocktail called the safe haven investment’ and they are predicted to keep on buying.