3 December 2015

Property off the boil?

We are definitely seeing an increase in the seizing up of the property market here in the UK’s capital for several reasons. The Yuan devaluation has hit the Chinese investor base, whereas oil related pressures have cooled the Russians and the Gulf States.

Property is still moving at the very top end (the £40m+ homes) but the market is generally slower due to the renewed level of stamp duty and HMRC’s more stringent application of money laundering checks over the origin of funds. HMRC took over from the OFT as the regulator of residential and commercial estate agents for the purposes of anti-money laundering in April 2014 and is proving a far more effective forces in terms of implementing and regulating the estate agency profession. The level of fines imposed by the OFT in its final year was astonishingly low and the HMRC are expected to tighten up imposition criteria considerably.

The National Association of Estate Agents recently noted an increase in unscheduled visits from HMRC to individual agency offices to check their compliance with anti-money laundering procedures.  It appears this has provided a welcome wake-up call to the industry’s application of standards.

The Autumn Statement has raised Stamp Duty on second homes from Q1 2016, hitting wealthy foreigners and the elderly, who have been investing heavily in property for their pension provision. This is a centrist move by Chancellor Osborne to win middle ground support as he manoeuvres to take over from PM, David Cameron in due course. Our political opposition is in considerable disarray at present under the ultra-Left Wing, Jeremy Corbyn and Osborne’s move helps a younger voter demographic that is struggling to get on the property ladder, particularly in the South East. In addition, even if the Bank of England does not synchronise a rate rise until 2017, it has new powers to restrict lending ratios by the UK banks and these effectively add a further headwind to house prices as they will stiffen mortgage criteria from early 2016, thereby capping house price demand levels.

The political impetus in the UK is to encourage house building at an affordable level and to try and help a domestic demographic get back onto the housing ladder. The criteria for “buy to let”, a bubble phenomenon of this low interest rate era, have been tightened too with tax benefits to landlords being restricted, lowering the attractiveness of renting out property as an investment class. The Bank of England can see, particularly in the South East, that development channels are burgeoning with a lot of new space co ming on. As many mortgages are on an interest-only basis and liable to see foreign investors try to cut investment-based positions on any setback in capital values, the Bank of England has aired its concerns that these capital flows may endanger the housing market and add to volatility. Basically, we have a lot of political engineering going on here, even before the interruption to international capital flows.

Internationally, major urban centres are all in retreat. Hong Kong property fell by -4% last month, its largest fall since 2008, reflecting diminished Chinese flows. In Australia, Bloomberg today reported that house prices at the top end are rolling over. In New Zealand, prices have been weaker of late, reflecting Government registration criteria restricting residents to the domestic auction scene. On both US coasts, housing is quieter with unseasonal supply entering the San Francisco condominium market and New York’s housing scene seeing increasingly patchy results.

Worldwide, we are seeing either increasing levels of political involvement or the exhaustion of international capital flows coming off the boil. All this implies a cooling off in major urban house price inflation rates, just as the Federal Reserve looks set to recommence the US interest rate cycle with an initial December hike.

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