Minimal growth forecast for prime central, outer London

KUALA LUMPUR: Prime Central London housing prices will likely remain unchanged while prime Outer London prices are expected to see a measly 1% growth next year following the imposition of higher stamp duty charges with talk of additional taxes, especially on homes valued from £2 million (RM9.7 million), said Knight Frank UK.

“We forecast that prices in prime Central London will remain unchanged overall next year, effectively bringing the boom seen over the past three or four years to an end, before a more moderate price growth is seen once again from 2014 onwards,” said head of global residential research Liam Bailey in a statement.

“However, we expect the separate sectors of the market to perform at different speeds because of the new stamp duty rules [introduced in March],” he added.

The stamp duty on acquiring homes worth over £2 million — raised to 7% from 5% for individuals and to 15% for those buying through a company structure — was raised in March, crimping appreciation of homes priced from £2 million to £5 million.

However, homes priced below £2 million in prime Outer London are expected to benefit from the new stamp duty ceilings next year.

“Crucially, the Chancellor also announced a consultation on further charges for those buying through a company structure — an annual charge of up to £140,000 a year, as well as an extension of capital gains tax.

“These measures will not be confirmed until next month, and have created an air of uncertainty among buyers who own property in a company structure, or who were considering buying a property in this fashion. As a result, there is an air of ‘wait and see’ in the market, and this has had an impact on transactions, with the over £2 million sales volume down 25% y-o-y in the three months to end-October 2012.”

Bailey noted that should the measures come to pass, there may be a switch of ownership affecting a “significant proportion” of properties owned through companies to private ownership, based on a survey conducted by Knight Frank in its Super Prime London 2012 residential market report.

Some 67% of the wealth advisors surveyed, who included tax accountants, lawyers, private banking and wealth management professionals, said “there was either some or much evidence of them looking to transfer ownership to a trust”. Half noted the same about transferring properties to an individual and 27% to a partnership.

“Some property owners may put their homes on the market, but some buyers will continue to buy and hold property through a company structure because it suits their needs,” said Bailey.

Adding to this uncertainty is talk about a mansion tax — either in the form of an annual charge on owners of properties worth £2 million and above or additional council tax bands for properties worth £1 million to £2 million. “The housing market can absorb change but long-term discussions create uncertainty, which can be the most damaging factor of all.”
This year, amid contracting values all over UK, homes in prime Central London and Prime Outer London bucked the trend to grow by 8% and 3.5% to date.

“Prime property prices in central London have bucked the trend of the wider housing market in the UK over the past few years, bouncing back 50% after the post-crisis trough to reach a new high.

“The demand for luxury London homes from overseas buyers looking for a safe haven for their money, as well as a slice of London life has helped drive price increases. The weakness of the pound makes the investment even more attractive, particularly for buyers who have currencies pegged to the US dollar.”

Protracted recovery ahead for overall UK market
Overall home prices in the UK slipped 2%, declining for the first time since 2008 where prices fell by 14.7%. The research house expects prices to return to their 2007 peak only by 2019.

The housing market is headed for the longest recovery, due to “unusual market conditions, rather than a genuine equilibrium in the market”, says Gráinne Gilmore, head of UK residential research.

An aerial view shows Trafalgar Square in London.
Prices in prime Central London are forecast to remain
unchanged overall next year; says Knight Frank UK.

“Transaction levels have roughly halved since the last market peak in 2007, and are 35% below the 20-year average, as first-time buyers and those further up the housing ladder struggle with tighter mortgage lending rules.

“The fundamentals suggest that a further correction in prices is needed as the relationship between average earnings and average house prices is well above the long-term average.”

While prices have been supported by “ultra-low” interest rates, borrowers are still struggling to re-mortgage as the maximum loan-to-value ratio now by most lenders stand at 75%, with the most competitive deals for those with equity of 30% to 40%.

“Most homeowners who do not have a 25% chunk of equity in the property must stay with their current lender, and are unable to reduce their monthly mortgage payments by shopping around the mortgage market for a more competitive deal,” said Gilmore.

She said the Bank of England and Treasury Funding for Lending scheme that was intended to encourage mortgage lending and loans small businesses has not made a big impact yet despite signs of lower mortgage rates.

“The recent Mortgage Market Review, which is likely to be implemented in 2014, underlines the fact that the current conditions in the mortgage market are not a post-crisis blip. Rather, this should be considered the ‘new normal’, and the housing market will certainly reflect that, taking years to reach the transaction levels seen at the peak of the market. We forecast only a 2% rise in transactions next year.”

First-time homebuyers without a 25% deposit are also finding it challenging to buy homes, she noted, although the government has stepped in with schemes such as Firstbuy and Newbuy.

This article first appeared in The Edge Financial Daily, on Nov 16, 2012.

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