London estate agent Foxtons released a set of poor results earlier this year. Their profits came down from a surplus ₤6.5m in 2017 to a loss of over ₤17m in 2018. Foxtons’ chairman quoted the “prolonged downturn” in the London property sales market to be responsible for declining profits. As a matter of fact, the market in the capital has not had the best of performances lately. Prices have been falling (Graph Data by HM Land Registry) and the market appears to have cooled down. A recent survey by the Royal Institution of Chartered Surveyors confirms that London has been the area hardest hit by the downturn in the market but it also suggests that activity is slowing down all over the UK. What are the underlying causes for such a development?
Brexit certainly plays an influential part, looming over the collective mind of the market. Prices were falling running up to an expected Brexit in March but experts were speculating, that a satisfactory agreement between the EU and UK could have led to a “Brexit bounce” upwards. Now with the deadline of October, uncertainty prevails, subduing activity both on the buyers’ side, as well as amongst sellers. This has led to houses taking almost twice as long to get sold as they did four years ago and a drop in sales volume overall (Graph Data by HM Land Registry).
The Forces of Change
Of course, this is not all due to Brexit: lack of affordable homes, increasing taxes, as well as expectations on the new prime minister all play their part.
On the other hand, there are also forces counteracting this downward trend: the cheap sterling as a result of 2016’s referendum favoured foreign investors, with money from abroad flowing into the London Market pushing prices. The chronic undersupply of houses in the London market also prevents heavy falls in price levels since the high demand holds them up.
However, there is a structural change that keeps house prices struggling: one of the largest purchasing powers on the UK property market is slowly forced out of the business. Changes in buy-to-let taxation and higher levels of stamp duty have increasingly disfavoured landlords beginning in 2014. The numbers show a clear exodus from the sector. A trend that will not change anytime soon, no matter, what kind of Brexit deal we will have. This reduction in rental listings also affects rent levels. Since there is a high competition for tenants, rents are still increasing, despite the political circumstances.
Buyer Confidence More Important Than Affordability?
All in all, the London property market is governed by a diverse set of factors. Looking towards October, Brexit will presumably be the most prominent of these in the short term. With the deadline approaching, buyer confidence will plausibly play a more important role than affordability in the movement of house prices this year. In the long term, however, we have to keep track of important structural changes that are occurring. Changes to property taxes, interest rate rises, house building, and the overall state of the economy will shape prices. Since property is principally a long-term asset, investors should keep their eyes on these developments regardless of how impactful short-term trends might seem.