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London property market “fragile”

It has been widely-reported over recent months about the stifling of the UK Housing Market as a result of a post Brexit Britain, political uncertainty and tax changes; leading to a continual cycle that will see the property market as increasingly unappealing to buyers. Comment from Michael Ferris, JR Capital.

The Royal Institution of Chartered Surveyors (Rics) has said: “Record low stock numbers, political uncertainty and the aftermath of tax changes are obstacles hindering the UK housing market, with price growth and sales activity subdued during the month of July.”

Brexit and continued Political uncertainty
In the aftermath of the Brexit referendum in June 2016, the prime London property market was seen as one of the big beneficiaries of the vote to leave. The assumption was that the fall in the value of the pound would make a des res in Mayfair, Belgravia or Chelsea more affordable for foreign buyers. However the reality has been quite the opposite with the London property market being increasingly fragile with prices falling, sales being weak and a chronic lack of supply. The previous jump in prices in the years leading up to the EU referendum had meant home ownership was simply too expensive for those working in the capital, so some form of market correction was inevitable. The uncertainty caused by Brexit has provided the catalyst.

The uncertainty of what a post Brexit Britain will look like has caused a weakening of London’s housing market with an under performance particularly among its most expensive properties. In fact, homes over £1m are having the most difficulty finding buyers, with many sellers having to accept price cuts. “At a national level, 68% of contributors identified homes valued over £1m as experiencing the greatest deviation when agreeing final prices…The market is desperately price-sensitive and too much stock is unrealistically overpriced.” This is a trend that is shown to be spreading to surrounding areas with measures of price inflation in southeast England and East Anglia declining.

The clear uncertainty within the market has also led to a chronic lack of supply. Sales activity remains flat through a lack of growth in new buyer enquiries and new instructions, buyers and sellers are evidently taking a cautious approach during times of economic uncertainty. In light of this many agents are being forced to throw in ‘sweeteners’ to sell prime property to international buyers; from exclusive artwork to furniture packages. Michael Ferris, JR Capital says it’s “a buyer’s market, so they have been able to ask for incentives.”

The threat of a Labour Government on growth
With the Labour conference in full swing, one can begin to look at the bigger picture should a Labour government become a reality, with many citing an impact on the sterling if Labour takes office. Although there is no certainty with currency markets there is a definite impact forecast on sterling in relation to overseas investment with a Labour government. In the first instance, Labour’s plans to increase the rate of tax on corporate profits will lead to a demand for lower prices to compensate for lower returns – this will either come in the form of a fall in the stock market or in the pound, or probably a bit of both.

Secondly, its’ tax and spending plans are likely to lead to a deficit with its plans not raising as much money as they claim “even in the short run, let alone the long run” (The Institute for Fiscal Studies). Finally, Labour has a number of plans that may affect business investment; reducing labour market flexibility, raising the minimum wage, capping executive pay in companies that bid for public contracts, higher taxes on executives, creating extra public holidays etc. All these combined will result in Britain being seen as a less attractive option for overseas investors and with its current account deficit, means Britain needs to attract foreign capital every year; a lower pound (or higher yields) will be needed.