This has been a lost decade for prime central London (PCL); over the period, one of the world's most prestigious markets has undergone a sizeable change from supercharged to near-stagnant.
House prices in PCL, which covers London’s most exclusive postcodes, have risen by just 5% over the past 10 years, according to Land Registry data. Other measures suggest prices have fallen. Either way, take inflation into account, and they have fallen by 25%-30% in real-terms.
As a result, the PCL premium —the price gap between this area and prime suburbs such as Fulham, Highgate, and Putney —has been steadily eroded, narrowing to 31% for flats and 55% for houses. This ‘exclusivity premium’ used to justify the big price tags of PCL.
THE SELLER'S DILEMMA
Anyone now contemplating selling a home in PCL faces a tricky decision. Most owners, having bought more than a decade ago are likely to still benefit from sizeable increases in value. The average gross gain since purchase is £599,000 or 66% for homes sold this year, although this is the first time since 2012 that the average uplift has dipped below £600,000.
However, the profits are not equally shared. About 24% of those who sold a home this year received less than they paid, against 7% in 2015. Owners who bought after 2014 and 2016, when higher rates of stamp duty were introduced, were most likely to suffer a loss. But those who bought more recently, typically at lower prices, probably avoided this outcome.
During the year to date, those PCL owners who have opted to sell typically bought before 2014. These sellers are less likely to face selling at a loss. Elsewhere in England and Wales, sellers have typically purchased their homes in 2021, marking a much shorter average period of ownership.
THE GREAT STANDOFF
These challenging conditions have produced a marked reluctance to put a home on the market. Since 2015, PCL owners have been 61% less likely to sell than those elsewhere in England and Wales, highlighting an enduring trend. Owners in almost any area will tend to be fundamentally loss-averse, preferring to wait rather than sell.
Conditions in PCL show that smaller short-term house price falls do not have a significant impact on the behaviour of buyers and sellers. However, when prices stall or decline over a period of 10 years, which is close to the typical time to own a home before selling up, transactions tend to drop sharply. This can create a self-perpetuating cycle of stagnation.
"About 24% of those who sold a home this year received less than they paid, against 7% in 2015. "
FUTURE REMEDIES
PCL house prices peaked in 2014,immediately after the reform of stamp duty, a change from which about 95% of buyers across the country benefited. In early 2016, the second home surcharge (then 3%) was introduced. Under this change, the stamp duty bill on a £5m property rose from £350,000 to £513,000; there was a higher increase to £763,000 if the property was a second home, which is common in PCL.
These sums are in marked contrast to the regime of the late 1990s when the stamp duty rate on properties of £60,000-plus was 1%. Today, the rates payable for a home of £1.5 million-plus vary from 12%-17%.
The far larger size of the tax burden has fundamentally reduced the desirability of PCL property as an investment proposition and also limited the potential for future price growth. However, recent rumours emanating from the Treasury on the replacement of stamp duty with an annual tax on a property’s value could potentially, revitalise activity in Prime Central London.
A well-designed replacement for stamp duty, which takes into account the amounts paid in stamp duty on the property and that only applies after 10 or more years of ownership, could restore some liquidity to PCL.
Our analysis, based on the purchase of a £5 million property, suggests that it would take about 21 years to raise the same amount through a 0.5% annual property tax as would currently be levied through stamp duty on the purchase of that home. This period would be extended to 30 years if the purchase were subject to surcharges. Spreading payments in this way would cut the amount that the buyer must raise upfront to meet the stamp duty bill.
Any review of the current operation of stamp duty would suggest that the elevated rates of the tax in prime markets are suppressing activity, and so cutting the revenue received by the Exchequer. The stamp duty tax take would almost certainly be larger if rates were lower, encouraging more relocation.
A shift towards an annual property tax on the value of a home, as a stamp duty substitute, could, in the long term, raise more cash for the Treasury. It would also lower the obstacle that stamp duty currently presents to buyers purchasing prime homes.
