Prime Market Braces for Another Summer of Speculation

Andy Burnham’s first speech as Prime Minister-in-waiting last week could afford to be uplifting and ambitious.

It was light on detail for someone who has craved the top job for years, but during this period of limbo between Prime Ministers, fiscal reality can take a back seat.

Plans affecting the property market may include aligning capital gains and income tax, a land value tax to replace stamp duty and council tax and the biggest programme of social housebuilding since the Second World War. There are also questions around devolved tax-raising powers.

For now, seeing this as anything other than a wish list would be premature, particularly in light of Labour’s unachievable manifesto plan to build 1.5 million homes.

I discussed how reality will bite and trade-offs will be needed on a recent episode of Housing Unpacked with former Treasury special advisor James Nation. For example, modelling has shown that raising Capital Gains Tax would produce less revenue and introducing a land value tax would take a number of years.

The difficult financial choices facing Burnham were no doubt brought home to him last week by the reported £4.7 billion shortfall in the Defence Investment Plan.

Furthermore, questions of legitimacy around the new Prime Minister will increase the further he drifts from the 2024 Labour manifesto, said James on the podcast.

Once Burnham and (possibly) Miliband are installed, have seen the books and had the hard conversations, it will be worth watching the leaks and newspaper headlines more closely. Even then, ideas may still only be trial balloons.

Summer of Speculation

For the prime London property market, it signals another summer of speculation ahead of the autumn Budget.

With the government seemingly unable to cut spending meaningfully or introduce broad-based tax rises, we could see a repeat of last year’s smorgasbord approach of smaller wealth-based rises like the higher-value council tax.

“The people who create businesses, back innovation, employ staff and support philanthropy are not an enemy class,” said a spokesperson for Foreign Investors for Britain in response to Burnham’s speech. “If Britain sends the message that success will simply be taxed, vilified and raided, many of those people will not stay to fund the next phase of national renewal.”

I discuss how wealthy individuals have been responding to the mood of political uncertainty and the more adverse interest rate landscape on the latest episode of Housing Unpacked with Alex Webster, head of lending at private bank Coutts.

The bank’s clients have become hardened to some extent by the volatility of recent years, she said, adding that 28% of the loan book is international.

“Our clients are almost expecting volatility to be the new normal. It’s something they are going to be watching very closely but they will carry on thinking about the long-term picture.”

We also discuss the importance of exchange rates for overseas buyers, how the bank responded to the recent interest rate volatility, and the changing requirements of buyers in prime and super-prime markets.

Immune to the Noise

Alex’s comments were echoed by Stuart Bailey, head of prime central London sales at Knight Frank.

“Last summer’s speculation ahead of the autumn Budget caused hesitancy in the market, and as a consequence, less stamp duty for the government coffers,” he said. “The reality was less severe than the impact of the speculation, which means buyers and sellers this summer have become more immune to the political noise and posturing, and are getting on with life.”

The annual price decline in prime central London (PCL) was 3.6% in June for the second month running, but there is still downwards pressure on activity as the lending landscape becomes tougher and political uncertainty intensifies.

The number of transactions in PCL in the year to June was 14% lower than the previous 12 months, Knight Frank data shows. That said, the number of offers made was only 4% lower over the same period.

The more needs-driven and domestic market of prime outer London is proving more resilient. Average prices fell 0.4% in the year to June, meaning they are at the same level as they were in June 2022.

The number of transactions in the year to June was 7% down on the previous 12-month period while the number of offers made was up by 5%.

Middle East Cracks

Meanwhile, the cracks from the Middle East conflict and associated rise in mortgage rates began to widen last week in the wider market. The number of UK mortgage approvals fell 14.8% to 56,205, which was the tenth largest monthly decline since records began in 1993.

For context, the two biggest drops were during the pandemic, while other top ten declines related to the global financial crisis, the ending of a stamp duty stimulus in 2010, the mini-Budget of 2022 and fast-rising interest rates in 1997 following the Bank of England’s independence.

Transaction numbers also fell 2% between April and May HMRC data showed, highlighting the absence of a seasonal spring bounce.

The latest declines have more to do with the Middle East conflict than rising domestic political uncertainty, although energy prices are coming under control as both sides move gradually towards a ceasefire. However, just as one headwind is easing, another is gathering strength.