Political fears are holding back London’s luxury housing market, and have overtaken tax hikes as the main obstacle to real estate deals, according to the city’s brokers.
Prices in prime central London began declining after a Stamp duty hike of around 2% on million-pound homes in 2014. And prices continued their freefall when a one-two punch hit the city’s housing market again in mid-2016: Stamp duty on second homes over £1.5 million increased to 15% in May of that year and Britain voted to exit the European Union in June.
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The industry has largely blamed the tax hikes for most of the woes facing London’s luxury housing market, but Brexit and its cascade of political and economic uncertainties appear to have overtaken higher transaction costs as the main obstacle to recovery.
On average, buyers of £1 million-plus (over-US$1.3 million) homes are paying 2% more in stamp duty than they were before the tax hikes, and roughly 5% more on second homes, according to analysis brokerage Knight Frank published on Thursday. Meanwhile, prices in the city have fallen 9% since their last peak in mid-2015, a discount that more than makes up for the increase in transaction costs.
"Despite this over-compensation, the forecast for price growth is modest and trading volumes are no more than stable, which indicates there are other forces at play," wrote Tom Bill, head of residential research at Knight Frank. "As highlighted during the recent visit by the U.S. president to the U.K., political uncertainty is one key factor."
Real estate agents surveyed in this month’s housing market report from the Royal Institute of Chartered Surveyors, also known as RICS, cited Brexit and political issues as concerns far more than stamp duty.
"Concern over the political and economic uncertainty continues to affect confidence. Low transaction levels mean it is difficult to ascertain price movements with any accuracy," said William Delaney, head of a London-based property management firm Lawrence Ward & Co, in the RICS survey.
Terry Osborne, director of Tuckerman Estate Residential Ltd, offered a one-word comment in the survey: "Brexit."
In total, industry professionals brought up Brexit 21 times compared to just five mentions of Stamp Duty, according to the survey, which RICS released last week.
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The latest Brexit fear is that it will impact future housing construction as foreign laborers leave, according to Savills 2018 housing market survey, released in June. Half of all construction workers on London sites are from E.U. countries, Savills reported.
"This is yet another example of how the housing sector is having to respond to a changing political and economic environment," said the Savills report.
Recent ministerial departures, including British Foreign Secretary Boris Johnson and Brexit Secretary David Davis, have exacerbated the general sense of uncertainty, Mr. Bill wrote in Knight Frank’s analysis: "Sentiment has therefore become a more important driver of demand, which makes the future direction of the London property market less predictable."