In many ways 2015 was a year of two halves, having started slowly before picking up pace after the general election in May, with the annual rate of house price growth in the capital reaching just over 10% - more than double the national average, according to Nationwide.
But it was a mixed picture across London last year mainly due to stamp duty land tax changing from a ‘slab system’ to a ‘banded’ system (much like income tax) from December 2014, the effects of which were felt particularly keenly at the top end of the market.
While the rate of house price growth and property transactions accelerated in outer London boroughs last year, activity levels slowed down in prime areas, including Fulham, as higher stamp duty costs at the top made it more expensive to acquire homes over £1 million.
Initial concerns about the Labour party imposing a mansion tax had discouraged purchasers prior to May’s election, but there was no revival in London’s high-end market, despite the Tories’ outright victory, because of the increase in stamp duty. Instead there was a continued slowdown in price inflation reflecting a more moderate pricing environment and greater sensitivity to asking prices on the part of buyers.
The higher rate of stamp duty, coupled with a fall in the number of foreign buyers acquiring homes in the capital - as a consequence of economic turmoil in the eurozone, China and Russia, along with harsher rules on non-dom’s status and property held through offshore firms - further cooled the top end of the Capital’s property market. Consequently, there was often deadlock between price-sensitive buyers and discretionary vendors resulting in homeowners opting to stay put, contributing to an overall decline in the number of property sales being agreed.
The year ahead
As we enter 2016, there are signs that demand from buyers is rising once more, on the back of greater consumer confidence supported by a surge in gross mortgage lending, which hit a seven-year high in October last year.
But while greater demand and improving mortgage lending conditions bode well for a further increase in housing market activity and potential house price growth in 2016, the dwindling supply of housing stock means that volume of available properties on the market has fallen to its lowest level since the late 1970s, widening the gap between supply and demand.
As Mark Hayward at the NAEA, puts it “there simply aren’t enough houses to match demand and we’re reaching crisis point.” This shortage of supply seems to suggest that conditions are set for price growth, albeit moderate, across prime London in 2016.
However, the government is determined to tackle the housing shortage and has vowed to deliver a whopping one million new build homes in England
In the Autumn Statement, the Chancellor George Osborne announced various measures to encourage building, which included pledging £7 billion to house building to help create what he claims will be the “biggest house building program since the 1970s”. “The problem at the heart of the housing market is a supply issue so we certainly welcome everything the government is doing to solve the supply problems,” said Alex Chesterman, head of Zoopla, the property website.
Despite the requirement for more homes, many analysts believe that the Chancellor’s decision to levy an additional 3% stamp duty on buy-to-let and second home purchases from April 2016 has introduced a major stumbling block to new housing supply.
The tax increase could deter house builders from building, partly due to a belief among some that house prices could fall as a result of the change. According to Stuart Adams at the Institute for Fiscal Studies, “Properties will be worth less because potential landlords and potential homeowners won’t be willing to pay as much for them,” he said. “If property developers don’t feel they’re going to get as much for them, then there’s less incentive to develop it.”
Rush to buy
Contrary to Adams’ concerns about a price drop, the stamp duty surcharge on buy-to-let and second home purchases may actually place upward pressure on property prices, at least in the first quarter this year, as more people rush to secure buy-to-let homes before April’s deadline.
“With the stamp duty changes coming on top of the tax changes from the Summer Budget, we are potentially facing a first quarter bubble in terms of the volume of buy-to-let transactions,” said John Eastgate at OneSavings Bank.
Howard Archer, UK Economist at IHS Global Insight, is among those that believe demand could be greatly accentuated over the next few months, forecasting that home prices overall will increase by 6-7% in 2016.
The government hopes that the buy-to-let market will slow after April’s tax deadline, enabling more first-time buyers and families, squeezed out by investor-driven purchasers, to purchase property. But the clampdown on buy-to-let investors will be “ineffective for its purported aims” of raising cash to help more people buy property, according to Mike Coady of deVere Mortgages.
Describing the tax measure as “something of a political stunt”, Coady thinks that the government’s decision to target buy-to-let landlords and second homeowner will not just “trigger something of a ‘rush-to-buy’ phenomenon between now and April” but may do little to reduce demand in the medium to longer term.
“Most investors will still regard investing in property in the UK, especially in areas like London, the South East and Manchester, as an attractive and safe investment opportunity,” he said.
Rent rises forecast
Various housing commentators forecast that the government’s buy-to-let tax hike will push up rents for tenants as landlords pass on greater costs.
“To make owning a buy-to-let property financially viable, landlords will need to pass on the increased stamp-duty costs to tenants,” said David Cox, managing director at the Association of Residential Letting Agents.
By the end of Q1 2016, the number of private rental sector households is expected to reach almost 5 million, accounting for almost one in five households, while the value of buy-to-let properties nationwide is projected to total £1.07 trillion, reflecting wider growth in house prices.
“Growing house and rental prices will steer the market,” said housing analyst Andy Phillips.
Room for growth
With record-low interest rates for at least another few months and housing supply set to remain low, the general consensus is that property prices will increase across many parts of the capital in 2016, including prime London, with mortgage lender Halifax projecting that house prices will rise by between 4-6% this year.
“Valuations are supported by the low levels of property for sale, low levels of house building, and exceptionally low interest rates,” said Halifax housing economist Martin Ellis. Various other property market analysts support Halifax’s projection for growth in 2016.
A Reuters poll of housing analysts found that home prices in London are expected to increase by 5% in 2016 and 4% in 2017, fuelled by record-low interest rates, growing immigration and a widening supply-demand imbalance.
Demand could soon be intensified by a rise in well-heeled foreigners acquiring property in London - perceived as a safe haven for their wealth - as they escape turbulence in markets abroad, particularly in the eurozone, where the ECB recently cut interest rates and expanded its QE program.
The hike in US interest rates in December has also seen the US dollar gain strength against sterling, making it cheaper for North Americans and those living in countries with currencies pegged to the dollar to acquire property in the UK, with prime London the preferred destination for most overseas nationals.
Capital growth in London may be led by other prime areas in 2016, but areas like Fulham remain among the most desirable locations offering a long-term safe haven for home buyers.
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