Since the results of the EU referendum there has been much uncertainty surrounding the prime central London property market. This will likely remain the case until we have some degree of political stability which could be the case in September/October when a new Conservative government is formed. At this point we will also have market data which will provide insight in to the immediate effect the Brexit vote has had to transaction flow and price movement.
We have carried out quantitative and qualitative research to show how the prime central London property market has reacted in the past to different scenarios. We believe that looking back could help us tackle the market going forward.
We have researched correlations between the prime central London property market over the last 20 years against:
- UK Interest Rate changes
- Stamp Duty Land Tax (SDLT) changes
- The 2008/2009 UK recession
- Great British Pound (GBP)
UK Interest Rate Changes
Interest rates have been on a downward trajectory over the last 20 years, with highs of 7.5pc in 1998 and lows of 0.5pc since 2009. It is difficult to assert whether prime central London property value increases are directly linked to interest rate declines solely. There have been times over the last 20 years when interest rates increased and the property market still made year-on-year gains. For example, in 1998 when interest rates rose to 7.5pc, prime central London property values rose by 14pc that year.
Anecdotal evidence suggests that buyers in prime central London are low borrowers and therefore less exposed to interest rate rises. Therefore, it seems interest rate changes would have more impact on the wider market than that of the prime central London market. As long as interest rates aren’t prohibitively high the prime central London property market can prosper.
Stamp Duty Land Tax Changes
Since 1997 there have been 8 stamp duty hikes aimed at the prime central London market. At the beginning of this period SDLT was introduced at 2pc for high band properties ending up at 12pc in December 2014, before an extra 3pc was levied on second homes and buy-to-let properties. Each time there has been a stamp duty hike transaction volumes have dampened. However, during each of the SDLT increases the prime central London market still made yearly value gains.
Over the last year and a half sentiment in the market suggests that SDLT has become prohibitively expensive and this has clearly slowed price growth. Positively, there has been some talk that SDLT will be reduced to give stimulus to the market during these uncertain times. This will become more clear when the new Conservative leader takes office.
Great British Pound & 2008/2009 UK recession
During the global credit crisis in 2008/2009 the FTSE 100 dropped from 6721- 3529. In March 2009 GBPUSD had fallen to 1.38 from highs of 2.11 the year earlier. The FTSE 100 was also trading historical lows. It was at this point due to a heavily weakened GBP that saw renewed long-term investment into the UK stock market. The FTSE 100 was back above 6000 only two years later. The prime central London property market recovered in a similar way. It lost 15pc during the credit crisis and due to the cheap GBP the market attracted large foreign investment and the market was back up to pre-recession figures only a year and a half later.
We are now in a similar position where GBP v USD is the weakest it has been in 30 years. It has had a sharp 10pc decline since the result of the EU referendum. Since the Brexit vote the FTSE 100 lost 8.6pc and GBP declined to 30 year lows. The FTSE 100 has already rebounded to levels above what it was trading pre-Brexit vote and around 13pc from the lows. This is due to increased investment from a weakened pound. Another point to note is the FTSE 100 is made up of global companies with less direct exposure to the UK economy. The same could be said for prime central London property as foreign investment constitutes a large portion of the market.
Over the last 20 years the prime central London market made average yearly gains of 10pc. If you had bought property in 1995 in prime central London and held it until now you would have seen capital appreciation of 213pc. At its worst during the 2008/2009 recession, property prices dropped by 15pc in just over a year. In the past 20 years there have only been two year-on-year losses to property values. In 2003 the market depreciated by 1.07pc and in 2008 the market depreciated by 10.53pc. This shows that whatever happens in the short term, history tells us that to buy with the intention of holding on to the property for a few years, the outlook should remain stable.
In summary, we cannot solely look at any individual factor to conclude what will happen to the property market in the short term. Each marker has an impact, and the more negative factors there are, the worse it will be for the market. For example, interest rates being low at a time where there is high SDLT is unlikely to have a greatly positive impact on the market. Obviously, if interest rates are high and stamp duty is high this is very likely to have a detrimental impact on the market due to increased costs associated with owning property.
The positive we can take from our analysis is that even though we are entering unchartered territory after the Brexit vote, the losses we saw during the 2008/2009 recession were short lived. Moreover, a weak GBP is a known factor to increase foreign investment in to our markets. Interest rates are currently very low and may go even lower in the short term. Stamp duty is currently high although there has been discussion to reduce this to provide stimulus to the market. Neither market sentiment, nor political risk is quantifiable. We will have to wait and see what happens over the coming months to see how the market adjusts in the short term to the UK’s vote to leave the EU.
Written by: Robert Espir, Director, Acquire London Ltd