London house prices set to fall: Is this the 'Brexit effect'?

Prices appear threatened by uncertainty following the Brexit vote, as many companies are now uncertain where their headquarters will be. The real estate agency Savills says the Central London market should rebound over the long term.

First Look

House prices in central London look set to fall more than any time since the financial crisis, according to two estate agencies.

Savills predicts that the value of Prime Central London homes – defined as those in markets where the average price is around £4 million –  will fall by 9 percent in 2016. Knight Frank says that the annual growth in the market for these homes hit -1.8 percent in August. The two agencies attribute this decline to two factors: stamp duty, or sales tax, and a Brexit vote that has raised questions about the future of London as a financial center.

Until June 23, when Britons voted to leave the EU, the value of being in London was more or less unquestioned by financiers and corporations. A historical financial center, it also gave corporations access to the common European market. Around 5,500 UK firms rely on “passporting,” as it is called, to conduct their activities in Europe – and over 8,000 companies based in other EU states do business in the UK on the basis of these corporate “passports.” It is these corporations that are now uncertain about the merits of doing business in London, raising questions for those who live there.

“Brexit has clearly been a reality check for the high-value end of the market…. It’s difficult to see where upward pressure on pricing will come from until we know the outcome of the negotiations,” Savills Research Director Lucian Cook told Bloomberg.

Vodafone, the telecommunications giant, began to investigate alternatives to London following the Brexit vote, as The Christian Science Monitor reported in June. Other European countries are making a play for the corporate traffic they believe will move to places that can still promise the free movement of people, capital and goods. But the absence of a clear alternative may help prevent huge outflows of capital from the London housing market, as it will take companies time to plan their next move.

Stamp duty, or tax, has compounded the current decline in house prices in central London. From April 1, tax on landlords buying homes to let and on those buying second homes increased from 12 percent to 15 percent on a home priced at more than £1.5 million. This increase means that a £4 million home is now £120,000 more expensive. The law applies to both domestic and foreign buyers. To escape stamp duty, buyers are now looking at homes further outside London. This has driven up house prices in outer areas.

Tom Bill, Knight Frank’s head of London residential research, expressed concern about this shift to City A.M. He said, "If the pattern persists, the risk is that demand and property prices in outer boroughs will become further inflated and more susceptible to future price instability."

Nevertheless, for US-based buyers, now may be the time to purchase London property. The pound has been down against the dollar since the Brexit vote, at around $1.30 to £1.

In the long term, Savills remains optimistic about the central London housing market. The real estate agency suggests that the market will rebound for 21 percent growth between 2017 and 2021, as the UK’s financial future, as well as its relationship with Europe, becomes clearer.

"There remains a strong preference for London properties in the long-term as the city is still considered by most as a safe haven, even on the back of Brexit. Nevertheless, we have seen some Middle East investors looking to re-allocate a part of their portfolio to other geographical areas, due to the uncertainty in the mid-term that Brexit has triggered," David Godchaux, the chief executive of Core, the United Arab Emirates associate of Savills, told The National.