Price growth for luxury homes in London’s wealthiest neighborhoods has slowed since last summer, according to a recent report, raising questions about the effect of tax changes and whether foreign demand is starting to weaken.
In its August residential update, Knight Frank reported that annual growth in prime central London in July was 2%, down from 7.9% in the same month a year ago. Prices had declined in prime neighborhoods like Notting Hill, Knightsbridge, Kensington and Chelsea.
What’s causing the cooling off and how long will it last?
“We expect less headline-grabbing growth and more moderate sane growth, a return to a single digit trend,” said Tom Bill, head of London residential research at Knight Frank. “Across the board buyers are thinking more carefully and focusing on best-in-class properties.”
Bill forecasts that prices in prime central London will rise between 4% and 6% between 2016 and 2019. Still, Knight Frank expects prices to appreciate a total of 23% by 2019.
The impact of the current situation in China is a global factor that bears watching, according to Bill. He says that there has been anecdotal evidence of a recent increase in Chinese buyers in prime London, but it’s unclear how China’s stock market volatility and devaluation of the yuan will impact the market.
Bill says foreign-buyer activity has been dampened by the stamp duty, a real-estate tax for home purchases. In December, changes were made to the existing stamp duty, and the portion above £925,000 is now taxed at 10%; the amount above £1.5 million has a rate of 12%.
CBRE, a commercial real estate company, said in a report that the stamp duty has had little impact on the London residential market for homes under £2 million, but is affecting luxury home buyers for properties costing more than £2 million.
Jonathan Adams, the director of Napier Watt, a real estate agency focusing on central London, said he is marketing a refurbished townhouse in Belgravia for £24.5 million. With stamp duty payment, a buyer would be liable for a tax of £2,853,750, almost 12%. Last year, the same buyer would have paid £1.715 million, or about 7%. Adams said his agency is “reflecting these changes within our pricing and valuation structures.”
“There is still significant interest at the higher levels but buyers are definitely taking a more cautious approach and negotiating harder,” Adams said.
Agents pointed to several other factors that could be holding back the prime central market.
“The pound, euro, dollar exchange rates are another factor, inward investment from the eurozone is more expensive this year than last and this is a factor that would also contribute to buyer's’ decision-making processes,” said Adams.
Alex Newall, the managing director of Hanover Private Office, a leading real estate adviser in central London, said that there are some homes in the area with “weak layouts and need work” that are priced too high.
Another factor he suggests is that mortgage approvals for buyers purchasing property for more than £10 million have slowed.
There are still several districts in prime central London that are expected to thrive in the next several years.
Mayfair and Victoria are still considered London hotspots by Knight Frank. Bill says that buyers are looking further afield near the district to neighborhoods like Bayswater, Kings Cross, Midtown and Southbank.
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