Consultants say anti-London political rhetoric is harming the city’s property markets

The uncertainty fuelled by this week’s general election on the London housing market is unparalleled and has resulted in a near flat lining of performance in both the sales and lettings markets, it is claimed.

The situation is having a stifling impact on the ability of vast swathes of the capital to retain any momentum, according to leading international real estate consultant Cluttons.

While the behaviour of the residential market mirrors what has been seen in previous election years, the anti-London political rhetoric has and is damaging the capital's real estate landscape, the firm says.

‘We are in the midst of one of the toughest forecasting environments in a long time. The likelihood of a hung parliament is just adding to the widespread election anxiety,’ said Cluttons' international research manager, Faisal Durrani.

‘Furthermore, the emergence of London as a scapegoat to win votes is having a damaging impact on the performance of the market, which could have ramifications for the rest of the country,’ he added.

He explained that with nearly a quarter of the UK's GDP activity emanating from London, it is difficult to understand why the commercial nerve centre of the UK is being targeted, adding that proposals for a mansion tax has reignited the debate of whether or not London's property millionaires should be taxed, giving further momentum to the anti-London political rhetoric.

‘The mansion tax really is a tax on London and the South East, where almost 90% of the UK's £2 million plus properties are concentrated. Some 27% of the population resides in London and the South East and hard working families will feel the biggest squeeze from any additional tax on higher value properties,’ said Durrani.

‘The reality is that £2 million no longer buys you a mansion in London and hasn't for some time. Two bedroom properties in Shad Thames, St. John's Wood and Pimlico are all in close range of the £2 million barrier and will be netted by any new London housing tax well before the end of the next parliament. A smarter approach might be to make adjustments to council tax pay bands, which no party has been willing to look at,’ he pointed out.
 
Among the Labour Party's housing policy initiatives is a controversial rental cap. The proposal calls for an effective freeze in rents for a period of three years, with CPI-linked increases allowed during this period.

‘In a deflationary environment, this is an easy promise to make, but what happens when inflation climbs above the level of rental value growth, or when rents decline? Our international experience tells us that rent caps are tough to police and artificially choke growth, creating unnatural cycles that are far removed from economic realities,’ Durrani explained.

He pointed out that in Abu Dhabi a decision was taken last year to remove the emirate's 5% rent cap as it was artificially holding back the market and was far too broad-brushed and didn't really accurately represent the varied market performance. Further up the coast in Dubai, a 3% per annum rent cap was abandoned in favour of a rent index, which tracks rents across the city, allowing landlords to adjust rents based on the official rent index, which estate agents feed into.

‘What this means is that tenants are to a large degree protected from anomalous rent rises and also see the benefits of any rental declines almost immediately. Of course no model is perfect and Dubai's rent index does not factor in the size of a unit, the view, the number of car parking spaces, the age of a building, etc., but it is probably a better model for the UK to consider,’ Durrani added.

‘The disadvantage for the UK from a restrictive rent cap is the undermining of the fledgling private rented sector, which is driving substantial capital inflows from overseas not only into London, but up and down the country,’ he concluded.