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Is now a good time to buy property?

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The housing market in London faces a slowdown ahead of the EU referendum.

The sharp rise in house prices in recent years has made the London housing market one of the most expensive places in the world.

Record-low borrowing rates, a strengthening domestic economy and a widening supply-demand imbalance saw the average price of a home in the capital hit £536,000 at the end of last year – an annual rise of 9.4%, according to the Office of National Statistics (ONS).

Property prices have continued to increase across much of the capital in the early part of 2016, as reflected by the latest home price sentiment index which hit a 16-month high in February. “While pay growth has been sluggish and the economic outlook weakened in recent months, a resultant expectation that interest rates will stay low for longer seems to have boosted UK house price perceptions at the start of 2016,” said Tim Moore, Senior Economist at Markit.

“In fact, survey data indicates that less than half of UK households [46%] expect a Bank of England rate rise over the next 12 months, down sharply from 71% in January and the lowest proportion since October 2013.”

However, greater confidence in the market may be short-lived. The Royal Institution of Chartered Surveyors (RICS) forecasts that the UK housing market will slow down over the next three months, fuelled largely by the introduction of a 3% stamp duty surcharge on 1 April for landlords and second home owners making fresh purchases. “Over the past three months, we have witnessed a surge in buy-to-let activity,” said Simon Rubinsohn, RICS Chief Economist.

“Investors have rushed to purchase homes before the stamp duty surcharge comes into effect. It is inevitable that over the coming months, April’s stamp duty changes will take a little of the heat out of the investor market.”

But there is another major issue that is set to have an impact on the housing market and reduce appetite for property investment: The EU Referendum.

A ‘referendum effect’ of a lull in property transactions is expected, particularly in London where housing is most in demand.

A recent poll of 1,000 homeowners found that found 47% of those in London will delay their decision on whether to buy property until after the vote on 23 June. Only 20% said the referendum on whether to leave the EU would not affect a decision to sell or buy property.

There are two sides to demand for property: domestic and overseas. There is a major difference between first-time buyers attempting to secure a first foot on the housing ladder and uber-wealthy foreigners seeking luxury-priced homes. They have different priorities in dissimilar markets and a Brexit would affect them in different ways.

Domestic buyers
A wide range of economists and property market commentators have come up with altering estimates of the potential impact of a British exit from the EU, ranging from virtually no impact to a major hit to the UK housing market and wider economy. Stephen Williams, an equity analyst at the investment manager Brewin Dolphin, does not think Brexit will have much of an impact.
“As far as domestic supply and demand are concerned, I’d say there aren’t that many major risks, other than if interest rates go up faster, or more than currently expected,” he said.

“We’ve still got this demand and supply imbalance and I think the demand is still there, supply is still limited. From a domestic point of view, I don’t think Brexit is going to have a significant impact at all.”

International buyers
Foreign investors have been attracted to the London property market for years – snapping up a wide range of homes, particularly in prime London areas, such as Fulham. A report published last year found that offshore companies have acquired more than £150 billion of property in England and Wales since 2000.

However, strict regulations and overhaul of stamp duty, making it more expensive for those who acquire higher value properties, has led to a decline in international investors’ interest in London property over the past 12 months.

The strength of the pound has also contributed to a drop in the number of overseas nationals buying property in the capital. But sterling’s value against a number of major currencies has dropped sharply since the referendum date was announced and the debate kick-started, while several investment banks, including Citi and Goldman Sachs, believe sterling will lose a fifth in value in the event of a Brexit, which would suddenly make the London housing market look attractive once more.

“The fall in sterling, which is likely to continue at least until June, is likely to attract international buyers into the market as property prices appear to be comparatively ‘cheaper’,” said Naomi Heaton, CEO of London Central Portfolio.

Analysts from Swiss bank UBS have suggested that sterling could actually fall to parity with the euro if Britain votes to leave the EU, which in turn would further reduce UK house prices for overseas buyers. “In our view, the largest part of the weakness in sterling since November can be attributed to increased concern over the possibility of exit from the EU,” the bank said.

Market overview
Changes to tax, such as the stamp duty hike on high-value homes, have hit the most expensive properties hardest. Consequently, home sales - and prices - in the £1.5million-plus market are falling, with London boroughs, such as Kensington and Chelsea, City of Westminster, and Hammersmith and Fulham, among the worst hit, as purchasers seek better value for money properties in other parts of the capital.

Outer London boroughs, where house prices are generally cheaper, are witnessing double-digit price growth, led by Newham with an increase of 20.9% year-on-year, according to Rightmove.

Sales volumes have dropped significantly at the cheaper end of the market, with properties priced between £100,001 and £200,000, for instance, having roughly halved year-on-year, the latest Land Registry data shows, reflecting the fact that there are fewer homes in this price bracket due to rising prices. Higher up the price scale, the figures show that there has been a 25% rise in sales volumes in the £500,000 to £600,000 bracket over the past year, while demand for properties priced £600,001 to £1 million also remains relatively healthy. The slowdown at the upper end of the market means transactions in the top two price brackets – £1.5million to £2million, and £2million-plus – have registered a marginal fall of around 4 per cent drop in volumes.

Uncertain times
Amid all the confusion and uncertainty that may enter the market surrounding a raft of issues from the upcoming referendum and 3% additional stamp duty surcharge, this could yet prove to be the year that favours the opportunist buyer.

Brexit has thrown up a number of opportunities for prospective purchasers, and may even increase their negotiating power, and some savvy buyers may be wise to run with the window of opportunity that this potentially creates now, as there does appear to be scope for sustained price growth beyond the referendum – whether in or out.

With the capital’s population forecast to soon reach 10 million, the need for more housing is set to grow. But in spite of a recent pick-up, housebuilding levels continue to lag behind demand, with little sign this will change in the foreseeable future. Consequently, long-term price indications for the housing market remain strong, with RICS expecting prices to rise by a further 25% over the next five years.

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