What a reduction in price of London’s luxury properties means for the rest of us

Unless you have been living under a rock, you will have noted that the luxury or premium end of the London property market has taken a big hit over the last year.

Why is this happening?

  • high stamp duty at the top end (£1.5m properties and up incur 15% stamp duty vs 12% pre-April 2016 if an “additional” home)
  • Regulations in China preventing the outflow of funds (some of which was used to purchase London property)
  • Sanctions on Russia preventing Russian buyers from entering the London property market
  • The oil price crash which hit the incomes for buyers from the Middle East who are large investors in London property
  • Unease over Brexit and what it will mean for the London market has meant some buyers are reluctant to enter the market and are taking a ‘wait and see’ approach. If bankers have to move from London, this will cause a glut of properties swamping the market

So what does this all mean? It means those who would have bought at the premium-level are now looking at buying in the mid-level which has lower stamp duty and is more affordable. This influx of buyers has inevitably pushed up mid-level prices.

We are also seeing price rises on the periphery of London as ‘normal buyers’ just can’t buy anywhere central anymore. As such their attention has turned to the ‘next best thing’ which is the more affordable areas on the outskirts of London. These places are not more desirable by the way. Their commute is just as bad and the amenities and local economies are as lacking as before. The only difference is the former London buyers have no place else to go. As such there have been huge rises in prices in these areas as more people fight over a limited housing stock.

What is interesting is that when buyers with more disposable income move into an area, the area changes. Boutique shops, gyms and artisan bakeries mushroom up to meet the needs of the well-heeled. While the commute is still bad, the area becomes a better place to live. As the area becomes a better place to live, more people want to move there and this drives prices up further. It is essentially gentrification. A lot of people complain about gentrification, except the existing home-owners who see the price of their home double in 5 years. Think about equity release and you get the picture.

Interesting graphic in the above article (central London prices going down and periphery prices going up like a ring of fire). Kind of makes sense, the people have to go somewhere.

So the purpose of the stamp duty increase was to cool down the property market and allow more people onto the ladder. In some way, the opposite has happened in that the mid-level has become even more unaffordable for the reasons highlighted above. Equally, those who would have bought mid-level are now looking at the lower level and this is pushing that part of the market too. With interest rates at record lows, the Bank of England is certainly not helping. Their hands are tied to some extent though as raising interest rates will cool the economy and with Brexit fall out not yet quantified, it is understandably reluctant to do that.  It may be harder than ever to get on the property ladder.

The takeaway? It may be harder than ever to get on the property ladder but if you are going to try, aim for the periphery of London as this is where you will get the most price growth, at least for now.

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