Welcome to the first Adam & Company Real Estate Perspective of 2016. Last year should have been a good year for all property investors, but tax changes determined the winners and losers. We are cautiously optimistic for 2016 – it has the same positive fundamentals as last year, but many tax changes will take effect this year and there may be more to come. This year our forecast is for a relatively modest, but still healthy, 5% gain in UK house prices, with slower growth in prime central London prices being offset by larger gains in Greater London and the regions.
Review of 2015
In retrospect, 2015 was characterised by uneven growth across the regions and the biggest gains came from the ripple effect to outer London. In the months leading up to the UK general election, market and media attention was focused on the potential for a mansion tax. But it was the higher Stamp Duty Land Tax (SDLT) in England and Wales that had already come into effect at the back end of 2014 that led to a slowing in transactions above £1.5m. This is likely to be compounded by the announcement of a further 3% increase on additional residential properties in Chancellor George Osborne’s Autumn Statement which comes into effect in April. Scotland followed suit in April 2015 with increases in Land and Buildings Transaction Tax and also introduced the additional 3% tax on second homes and buy-to let properties.
Prime Purchase, the buying arm of Savills and one of the firms on our panel of buying agents, recently noted that the contraction in London house prices has closely matched the percentage increase in transaction costs in each bracket. For example, house prices around the £5m mark contracted by 4.7% in 2015, compared with an increase of 4.1% in stamp duty.
These changes could have an impact on international investors’ demand for UK property – and in particular London property – as a place to park their cash. Prime Purchase cited the strong pound and large pipeline of new flats in London as reasons for investors to “think very carefully about where they invest and the length of their investment period”.
The main supportive factors in our cautiously optimistic outlook for UK residential property are the favorable underlying economic fundamentals. Interest rates have been at their historic low of 0.5% for almost seven years, the unemployment rate is the lowest in nearly a decade at 5.2%, and despite modest wage growth, inflation remains close to zero. All of this bodes well for the property market.
Of course, the impact on affordability of an increase in interest rates, when it eventually comes, will depend on the size and speed of the rise. The US Federal Reserve raised interest rates in December by a quarter percentage point and pledged a gradual pace of increases. The UK is likely to follow suit, but Bank of England policymakers have indicated a willingness to wait for inflation to firm more before hiking rates. The path of inflation may well be decided by external influences (e.g. oil, commodities, exchange rates) more than internal ones (e.g. wage growth, supermarket price wars).