Almost three months after the British public voted in favor of leaving the European Union, Savills, a global real estate consultancy, has become the latest organization to deliver its verdict on what it all means for central London’s housing market, including the likes of posh Knightsbridge, Chelsea and Belgravia.
It has predicted that prices will fall by 9% this year in prime central London, where the average cost of a home is around £4 million (US$5.2 million). If this materializes, it will be the biggest drop since the financial crisis struck back in 2008. Prices are then expected to remain stagnant for the next two years as Brexit negotiations play out, before returning to growth of around 8% in 2019, according to the firm.
Like others, Savills believes that the Brexit has compounded the impact of a double dose of sales tax hikes, known as stamp duty, which has weighed heavily on demand since the U.K. government first slapped higher rates on more expensive homes at the end of 2014.
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Under the old system, a buyer of a £2 million (US$2.6 million) home would have had to pay £100,000 ($129,769) in stamp duty, but this has risen to £153,750 ($199,505). The cost of taxes on a £6 million ($7.9 million) property, meanwhile, has jumped from £420,000 ($544,960) to £633,750 ($822,306).
What’s more, buyers of second homes or investment properties face an even higher tax bill after an additional 3% surcharge was introduced for these purchasers back in April.
The prime central London markets have been most impacted by changes to stamp duty since 2014. Prices were already around 8% below their 2014 peak by the time of the Brexit referendum, including a 2.2% drop in the first six months of this year.
While outer prime London, where the average house price is £2 million, was less impacted by the 2014 stamp duty rises, with values rising 2.3% in 2015, the 3% surcharge combined with pre-referendum uncertainty has started to weigh on activity. As a result, Savills is forecasting price falls of 5% for outer prime London in 2016.
"The combination of high levels of stamp duty, a substantially less benign underlying tax environment for overseas owners, and general uncertainty following the Brexit vote, indicates that further price adjustments are needed to make the market more fluid in London," said Lucian Cook, Savills U.K. head of residential research.
"Two further years of uncertainty, as the government’s crack negotiating unit tries to extricate the U.K. from the E.U., are also likely to limit the prospect of any serious price growth over that period."
However, in a separate health check of London’s housing market, another real estate consultancy, Knight Frank, argued that a bubble could emerge in the prime outer London markets.
The consultancy cautioned that for two decades, rising transactions in central London have typically been followed by declines, as activity and house price growth spreads to outer boroughs as part of a ripple effect. After two-to-three years, this trend usually reverses, as central London prices become more attractive relative to outer London.
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But there are few signs of sales increasing in central London following a broad decline in volumes that began several years ago. As a result, Knight Frank warned that if the pattern persists, "the risk is that demand and property prices in outer boroughs will become further inflated and more susceptible to future price instability."
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