"Politics is not the art of the possible. It is choosing between the unpalatable and the disastrous" - John Kenneth Galbraith
"In the first place, God made idiots. That was for practice. Then he made school boards" - Mark Twain
Welcome to the new look Mercury Prime London Property Report - Please note that this report relates to residential property in prime central London - Mayfair, Knightsbridge, Belgravia, Kensington, Chelsea, Notting Hill, Bayswater, Marylebone & Westminster.
My brief thoughts for the month focus on the two quotations because the property market (and indeed stock markets) are becoming increasingly politicised with the continuous money printing, tax changes and other market "stimuli". Unfortunately, I think if Twain were alive today he would add politicians to his disdain for school boards.
The tax changes that were mooted in March's Budget were clearly not founded on factual research as the use of corporate structures to avoid stamp duty was in fact fairly limited - in eleven years of acquiring properties not one of our clients had ever used such a scheme to avoid SDLT. The announcement was politically motivated and it has been evident that they had no idea of the wider implications of such a move. However, it made a good news story and will have appealed to those in the electorate who seem to believe that the rich have money because they are either lucky or dishonest. Clearly hard work, learning, accurate thinking and intelligent action are irrelevant…
Suffice to say this policy has affected demand:
Lonres figures for the period of June 2011 to 2012 show that the number of:
Sales between £1m - £2m are down 27%
Sales between £2m - £3m are down 27%
Sales between £3m - £5m are down 43%
Sales above £5m are down 36%
Andrew Phillips at Hamptons "contends that activity in the £2m-plus property market has fallen by more than 40 per cent in 2012, representing around 700 fewer transactions" (please note that this figure is for the UK).
Meanwhile Knight Frank reports that "London's upmarket residential property prices saw a further increase in September, showing a 51% increase since the low points of March 2008. But tax modifications have affected some sector of the market, with the sales in the £2 million to £5 million segment falling 20% in the quarter to September compared with the same period last year. "Sales volumes above this bracket have been more robust, and there has also been a strong 23% rise in sales volumes for homes worth up to £2 million. The sub £2 million bracket is also where price growth has been strongest, with an annual increase of 11.6%"
This trend is confirmed by Savills:
"Increased taxation at the point of transaction alters buyer behaviour. Since the 2012 budget we have seen sales in the £2.0 to £2.2 million price bracket fall by 29%, whilst those between £1.8 and £2.0 million have risen by 37%... The rate of price growth in prime central London has slowed dramatically in the past six months, with average price rises of just 1.2% over that period masking the fact that the majority of properties in the Savills prime central London index have seen no price growth at all."
Whether this fall in demand is due to the fact that many buyers are simply waiting for confirmation of the proposals in December, so that they can plan sensibly or whether the new tax proposals are themselves genuinely deterring buyers is impossible to tell at this stage. The hope of many was that the inevitably slow August due to Ramadan and the Olympics would be replaced by a surge in buyer interest. This has not happened in my view. Demand is definitely weaker than most observers expected (and is dire outside of London). However, the severe lack of quality property means that prices for the best properties are remaining fairly firm. However, there are a huge number of price reductions taking place on secondary and tertiary properties. Buyers are, at last, becoming more selective.
Of course the politicians' stupidity does not end with the changes to SDLT and ownership of properties over £2m. The Lib Dems are also suggesting that anyone who owns a house over £1m should be scrutinised to ensure that they are paying the right tax; Orwell and Huxley have been proven right once again - Big Brother is watching…
However, their most extraordinary suggestion has to be that pensioners should be allowed to use their pensions to buy property for their children or grandchildren. Now this may be a sensible idea for a tiny, tiny percentage of people. However, it strikes me that:
a) You would need to be rich to be able to have accumulated such a pension pot. Therefore this only benefits the exact people the Lib Dems seem hell-bent on attacking
b) Such a move would only help to subsidise current prices which again shuts out "the poor" who they claim to want to help onto the property ladder
Of course there are numerous other levels on which this scheme is idiotic, but it highlights one very important fact. Politicians are running scared and interfering even more than normal. They are all desperate to be re-elected and therefore feel that they must be seen to be doing something… anything… no matter how hare-brained. Unfortunately, in the history of mankind this has invariably resulted in more rather than less problems - the law of unintended consequences will rear its ugly head.
The overriding question while all this is happening is: "will prime London property continue to be a better store of wealth than equities, gilts and cash?" I have no idea and nor does anyone else. Inflation, Deflation, Stagflation, Deflation followed by Hyper-inflation are all possible. Continued increases in taxation on the wealthy could/will affect prices at some stage. Indeed the price premium London commands over other world cities may create a ceiling for prices and drive buyers elsewhere. Conversely other nations' politicians seem to be trumping ours, so London is still more appealing than other global cities. This may continue for some time.
My advice to clients remains the same: maintain a balance so that you can cope with any situation. If you are overexposed to property then buying more is probably not the best course of action; seek advice and diversify elsewhere. Conversely, if you are underexposed or simply need a home be patient and wait for the right opportunity. Whatever happens, do not make an acquisition out of frustration (it does happen) or be panicked into settling for an average property.
To learn more about acquiring property in London click here to download your free copy of "The Seven Most Expensive Mistakes London Property Buyers Make". Jeremy McGivern is regarded as one of the leading experts on buying property in prime central London. He has featured on Bloomberg Television and in publications including The Financial Times, The Times, Money Week, Forbes & The Daily Telegraph