Since 2009, the traditional prime central London market has enjoyed years of robust growth; however, over the last 12 months sales activity and house price growth in the high-end market has dwindled, reflecting an oversupply of high-profile and high-value properties. London has often been regarded as a global hub for property investment due to its so-called ‘safe haven’ status. News of slowing growth may therefore come as a surprise to many. So, what has caused house price growth in London’s high-end market to weaken?
Before we answer this, let’s take a look at the definition of prime central London. While the definition may vary across industry sources, the prime central London market typically refers to properties priced at £1 million and above. Similarly, while the super-prime market lacks a formal definition, leading market sources usually refer to the £10 million-plus properties. These definitions cover some of the familiar prime locations such as Belgravia, Knightsbridge, Mayfair and Chelsea.
London’s property market has long been known for its supply shortages and robust demand. While the supply-demand imbalance still remains overall, in the niche of prime residential, the roles have now reversed. An oversupply in the high-end residential market against a backdrop of subdued demand primarily explains the recent slowdown in house price growth. Here are some key reasons for slower demand:
- Stamp duty increases – In December 2014, the stamp duty land tax (SDLT) was changed from a ‘slab system’ to a marginal system like income tax; i.e., rather than paying a single rate of tax based on the entire property purchase price, different rates of tax are now payable on the portion of property price within each band. Under this reform, it is purchasers of properties over £937,500 that will pay more. In addition, for second-home buyers and buy-to-let investors, an further three percentage-point SDLT on top of current rates was put in place from April 2016.
- EU referendum – Uncertainty ahead of the EU referendum has impacted investor confidence, with many adopting a ‘wait and see’ approach, thus holding back investment decisions for prime residential properties. The good news, however – the fall in Sterling since November 2015 – may offer some relief to the high-end market, although it may not be enough to offset other downward factors.
- Global economic developments – Activity in prime central London is primarily dominated by wealthy foreign investors. Recent falls in commodity prices and a slowdown in China have had a dampening effect on demand from these investors, particularly from emerging markets and the Middle East.
According to Savills, house prices in the most expensive markets of prime central London decreased 2.3% year-on-year in 2016 Q1 and were 6.7% lower than the peak in 2014. Knight Frank painted a similar picture in its latest reports, highlighting a decline in annual house price growth in the super-prime market.
Similarly, sales volumes for higher price brackets also fell according to the Land Registry, implying that the increased tax burden and growing uncertainty may have started impacting high-end buyer behaviour. Knight Frank reported that the number of super-prime transactions fell by one third in 2015, reflecting price sensitivity in the niche. As for the prime central London market, property transactions increased in March as investors rushed to complete purchases ahead of the SDLT hike in April 2016, a factor that is only likely to make sales figures look even worse in Q2.
Looking ahead at the next 12-18 months, given that property purchases in the high-end market will now be subject to higher transactional costs, several industry forecasts anticipat house price growth will remain flat this year.
Also, with further high-profile homes set to come onto the London housing market over the medium-term in areas such as Nine Elms, Chelsea and Fulham and Southbank, supply will continue to outstrip demand. Expensive new homes in Nine Elms for example are out of reach for most local home buyers. Even though house price growth has slowed, it is highly dependent on demand from foreign buyers. With the high-end target audience limited, the growing gap in the niche is likely to remain unfilled.
While the situation may significantly contrast against the mainstream housing market (which continues to experience strong demand across the UK), are we likely to see any spill over effects? And if so, to what extent? Factoring in these and other risks, the CPA forecasts private housing growth of 4.0% in both 2016 and 2017.