Is property investment growth still possible?
Aside from the cachet of living in one of the world’s most desirable cities, investment in London property still has to be attractive from a financial viewpoint. Low interest rates have had a negative impact on investment returns in many financial markets, pushing investors to search for yields in other asset classes. This appetite for higher returns has fuelled some of the capital growth in the property market. Transaction levels in the prime London market have been patchy in some periods but overall its price recovery has outpaced even gold – the ultimate safe-haven commodity.
Even though prime London property has outperformed other assets over time, price growth cannot accelerate forever. If it becomes detached from the underlying fundamentals of the economy, expectations of future growth will suffer and prices will adjust until they realign. Such rapid price growth in the Noughties was unsustainable, investors’ expectations began to weaken from 2013 and so did the pace of price growth.
There are two reasons why this happens. First, as prices become detached from other housing markets the pool of potential buyers shrinks, meaning those who wish to sell quickly will face price negotiations. Second, as prices in the most exclusive areas become unaffordable to all but the wealthiest, buyers look to adjacent areas where there is better value for money – and more opportunity for future price growth. This has benefited both areas on the fringe of prime London and towns further afield.
Recent changes to UK property taxes and the prospects for the UK economy as it negotiates its exit from the EU have also influenced the pace of capital growth in the prime areas of the capital. And, they are also affecting expectations of future capital gains.
The raft of tax changes that hit the most expensive homes and company purchases hardest changed the investment sums, too. Additional costs of buying have been factored into purchase price negotiations. On top of that, the new supply of luxury property coming on stream added to weakening expectations and price negotiation. The below chart shows how the amount of transaction tax paid by buyers has increased over time and by property value and ownership.
While it is true that overall property taxes in the UK rank highly in the Organisation for Economic Co-operation and Development averages, the comparison is not straightforward since the structures of tax in different counties make like-for-like comparisons almost impossible. Most UK property tax is raised from sales of property, while annual property taxes are very low. In other countries they are much higher and wealth taxes can also play a large part in the cost of investing in and owning property.
Comparing costs similar to stamp duty, i.e. upfront purchase taxes and fees to the government, shows the UK is relatively highly taxed but its annual charges are much lower. In Hong Kong, annual property charges are as high as 15%, while in the UK these add up to less than 2%. New York and Paris also charge significantly higher annual property taxes. This is important to bear in mind when investing for the longer term.
Even taking tax changes into account, property price growth in London’s prime markets compares very favourably with other attractive ‘global’ cities.