LONDON — After decades of runaway growth, house prices in "prime" central London fell further and faster than any other part of the country in the past two years.
A market which had shown signs of faltering before the EU referendum softened quickly.
Estate agents Savills found average prices in London's hyper-expensive central boroughs like Chelsea and Mayfair fell 1.3% in the three months to June this year, meaning they are now down 14.4% from their 2014 peak.
Some have speculated that falling prices could anticipate something worse to come: The Mirror newspaper even quoted an academic predicting a 40% crash in UK house prices, spiralling out from the London market.
Most analysts forecast a return to runaway growth which outstrips the rest of the UK — something that has come to characterise London's prime central market. So which factors have driven the slowdown, and which will return it to growth?
What is "Prime Central London?"
Which London districts qualify as "prime central" varies according to who provides the definition.
Loosely it is defined as the boroughs in the very centre of the capital, including Westminster, Kensington & Chelsea, and Notting Hill:
Estate agents do not measure house price average for PCL as a whole, but the average house price in Kensington & Chelsea is now £1,281,400, and £986,400 in Westminster, according to Hometrack. The average UK house price is £211,300.
There are also "prime outer" areas, including Prime West London, which includes Hammersmith and Chiswick, and Prime North West, which includes Hampstead and Primrose Hill.
What's causing the slowdown?
Prime central price falls in the last two years have been driven largely by tax changes introduced last year.
Following a hike in 2014, a change in April 2016 means stamp duty — a tax levied on every house purchase — was reduced for those buying a house below £1 million, and increased for anyone buying a house worth more than £1 million. If you happened to be buying a second home — as many in prime central were — a further 3% surplus was added to the stamp duty bill.
"The slowdown in essence started in December 2014, possibly a little bit before," said Lucian Cook, head of residential research at Savills. "I think at that point, there had been a succession of stamp duty increases which the market had broadly been able to absorb, but had slowed levels of house price growth."
"That market just couldn't absorb those first stamp duty changes in December 2014 anymore."
"The market then broadly stayed flat for a period, until an additional 3% stamp duty was introduced in April 2016. That brought a bit of demand in during the first quarter of 2016 [as people rushed to buy homes,] but left a dearth thereafter," Cook said.
The Brexit effect?
Many analysts will point the blame squarely at the impact of Brexit when discussing price falls in Prime Central London. But many analysts, including Savills, forecast a return to growth in 2019, the same year as the UK is scheduled to leave the EU.
So how big an impact has it had?
"If the market was looking relatively fully-priced at the tie of the Brexit vote, and there was a higher tax liability [for buyers,] that meant it was more exposed to Brexit, said Cook.
"So you had that additional adjustment in the period post-referendum. It's one of a range of factors."
Foreign investment: "Brexit uncertainty clearly affects overseas buyers"
Prime Central areas like Kensington & Chelsea and Mayfair are now characterised by the glut of foreign investment that has poured into them, with turbo-charged house prices and streets lined with gold-plated supercars.
So have overseas investors been put off by Brexit uncertainty, or attracted by a weak pound which has fallen sharply against the dollar since the referendum?
"Brexit uncertainty clearly affects domestic buyers and overseas buyers," Cook said.
And while the weak pound is attractive, Cook said changes to that recent changes to capital gains tax for foreign investors have offset much of that attractiveness, which has contributed to the market's sluggishness.
A big return to growth? "The core of London as a global financial centre remains unchanged"
Savills forecasts a dramatic return to growth in Prime Central London in the next five years. The 21% growth figure outstrips its 13% prediction for the UK, and its 11% prediction for the whole London region.
What will drive that growth in the same year Britain is charting an uncertain exit from the EU?
"I think people have been more reluctant [to buy and sell] because of certain factors: Slight uncertainty around Brexit, a bit of uncertainty about City employment, but also, some of that currency advantage has been offset by the greater exposure to tax. It takes time for all of that to be absorbed," said Cook.
"And so I think after the price adjustment, you will then have this further period where the market gets used to it, which coincides with two years of Brexit negotiations, and then history tells us that the market returns to growth because the fundamental factors that drive prime central London are still there."
"Generally, London continues to be a key world city," he said.
"It continues to be a global financial centre, albeit that some of the banking operations may relocated to other parts of the country after Brexit.
"Fundamentally, though, the core of it as a global financial centre remains unchanged. And it continues to have all of its qualities: timezone, language, stable political system, and a transparent legal structure. That will continue."
An undervalued pound
Nick Whitten, director of residential research at property firm JLL, said the price recovery is likely to be driven by the weak pound, which Oxford Economics forecasts will strengthen over the next two years.
He said the fall in sterling's value after the EU referendum "has meant that dollar-pegged buyers of PCL property have enjoyed a circa 20% value arbitrage [since the referendum.]"
“It's possible they [foreign investors] have been the prime movers in terms of transactional activity. The pound is still considered to be undervalued [according to Oxford Economics].
"If a dollar-pegged buyer who came into the Prime Central London market now, shifted assets into sterling, and waited on a currency appreciation, they would expect to see an increase in the value of that transaction.
"PCL is a market that's seen its repeated troubles for the past two or three years, but the signs are looking up for it, based on that international dimension.”
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