While there may be some uncertainty about the future of London property, current market challenges were set in motion long before the Brexit vote on June 24, 2016. What is really going on with real estate in Britain’s capital?
Only a few months on from the referendum and Brexit makes an easy scapegoat – even before it’s actually happened. But the fact remains that, in or out of Europe, London housing was facing some serious challenges already. Here are five reasons why:
1. High prices
January 2016 saw the biggest jump in house prices for 14 years, with a 2.5 per cent increase. The Land Registry recorded a further 13.9 per cent annual increase in London in 2015, which is roughly double the national rate. With the average house price reaching £530,409 and luxury properties costing tens of millions, many believe that price of London properties has simply become too high to be sustainable.
2. Stamp duty
From April 1, 2016, the former chancellor George Osborne introduced an extra 3 per cent stamp duty on the cost of all new second properties, with no exemption for purchases of multiple properties, adding thousands of pounds to the cost of investing in buy-to-let. This sparked a flurry of buy-to-let buying before April – and a significant lull afterwards.
3. Market uncertainty
Brexit isn’t the only contributor to market uncertainty. Some events – such as the 2008 financial crash – leave a lasting impact on the stock market, others are more fleeting. In George Osborne’s March 2016 budget speech, for example, he warned of a “dangerous cocktail of risks”, made up of turbulent financial markets, low productivity growth across the west, and a weak outlook for the global economy.
The global outlook had an impact on London property prices, too, which dropped by 0.1% in February 2016. While Brexit’s full effect on the financial markets, both globally and locally, remains to be seen, there have been – and will be – many other events that will also have an impact on the market, from fluctuations in oil prices to the recent and imminent elections in the US, France and Germany.
4. Shortage of stock
While there has been a significant increase in newbuilds in the past year, London is a finite city, and some areas will always be more desirable than others. Inevitably investors find themselves competing in prime areas – Mayfair or Belgravia, for example – and for prime properties, and there are only so many that can be sold or bought at any given time. And ultimately, while scarcity helps build the market, it also limits it.
5. Phasing out of buy-to-let tax relief
At present, landlords are able to deduct the interest paid on their mortgage from their rental income before declaring their tax. However, in 2015 George Osborne revealed his plans to phase out buy-to-let tax relief, starting from 1 April 2017. This means from next year landlords will only be able to offset 75% of their rental income at the usual rate, with the remaining 25% at the basic rate. There will then be a 25% decrease each year until all mortgage interest tax relief will only be at the basic rate by 2020; this has the potential to severely eat into profits.