Prices for luxury homes in London are expected to fall by 9% in a year due to stamp duty tax and EU referendum, says Savills.
Estate agents Savills forecast for prime central London property worth an average of £4 million is to fall by -9% or £360,000 in price over the next year.
A combination of stamp duty tax for second homes and the result of the EU Referendum will delay the return to growth for the luxury market in areas such as Mayfair, Chelsea, Knightsbridge and Belgravia for a further two years.
Savills expects prices to hover around zero before returning to capital growth in 2019 as the Brexit negotiations by the government progress.
A fall in house prices means older homeowners using equity release are offered a smaller amount from their property and remortgage buyers have a lower loan to value so they may not have access to the best mortgage deals.
Prices to remain low for two years
In prime central London property prices were lower by -3.3% in 2015 and have reduced by -8.1% since their peak in 2014 by the time of the EU Referendum.
Prices were lower by -2.2% for the first six months of this year and Savills believes that further price adjustments of -6% or -7% are needed to secure a sale until the impact of Brexit on the London economy is clearer for buyers.
Luxury properties are usually out of reach for first time buyers and most home movers even though house prices have reduced.
For international buyers the fall in the value of the pound is a clear boost, however, prime central London property is expected to be lower by -9% in 2016 and stabilise for two years.
Buy-to-let investors may not have the capital to buy luxury properties and prefer outer London locations where property is cheaper to generate higher yields.
Lucian Cook, Savills UK head of residential research said there will be opportunities across the prime London market for those prepared to take a medium term year view.
Prime London market have generally rebounded strongly after a period of adjustment and looking ahead, London’s position as a world city, a global financial centre and its infrastructure should underpin a return to trend levels of growth, said Mr Cook.
The market is expected to return to growth in 2019 with a total rise of 20.8% in the five years from 2017 to 2021.
Outer London less affected
In the lower value outer London prime domestic markets the average house price is less at £2 million and the stamp duty tax increases have had the same impact resulting in a price rise of 2.3% in 2015.
For outer London the extra 3% duty on second homes and the referendum are expected to suppress growth with price falls of -5% in 2016 and -1% in 2017.
For home movers moving from outer to central London the gap between their current home and the next may have decreased which means they need a smaller deposit for their next purchase.
The rise in London house prices has allowed the equity release mortgage buyer to access cash in their property to consolidate debt, for home improvements or even buy a more expensive home.
Total growth for outer London in the five years from 2017 to 2021 is expected to be 14.6% which is lower than prime central London property reflecting mortgage lending constraints and greater caution around financial sector job security.
Mr Cook said we need to see downward adjustments in house prices of -5% to -10% to bring buyers back to the market.
The current situation is similar to the 2002 to 2004 post bull run period when a less significant financial shock combined with an uncertain geopolitical backdrop.
The market will inevitably remain susceptible to fluctuations in buyer sentiment, but there is nothing to suggest the impact of the vote to leave Europe will reflect that of the global financial crisis, said Mr Cook.
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