For anyone trying to climb up the bottom rungs of the housing ladder that’s good news
The mansion tax hasn’t happened yet, but fears that Rachel Reeves will bring one in have already hit the upper end of the London property market, and the effect of that will be to cause a slump in prices across the rest of the UK.
The big change in the capital is the fall in the number of properties being sold in the prime areas. Sales volumes are falling everywhere, but the biggest declines are in six boroughs. In Mayfair, where the average sale price is £1.5m, transactions are down 60 per cent. In Chelsea it’s 47 per cent down, Belgravia 44 per cent, Westminster 28 per cent, Hampstead 23 per cent, and Kensington 21 per cent. As for prices, they have been broadly flat across the capital as a whole, but down 3.8 per cent in central London.
All this has happened before the recent rumours of an additional tax on high-value properties. The reason is pretty clear. Knight Frank, the estate agents, blames the changes in the tax rules for non-doms, many of whom have moved abroad. The point here is that what has happened already in London could be a foretaste of a similar collapse in the number of transactions in higher-value homes across the rest of the country.
This has implications for prices. While falling transactions do not immediately affect these because would-be sellers tend to withdraw their homes from the market or hold off selling, there are always some people who have to sell and that eventually feeds through into a decline in the market overall.
Were interest rates to rise rather than fall, the numbers of forced sellers would inevitably rise, but even without this there is a lagged response to a decline in activity. Would-be sellers often have unrealistic expectations for the value of a home, and when faced with a weak market it can take a while for them to realise they have to cut their asking price.
The next question is how extensive the downturn in prices might be. It’s pretty much guesswork for two reasons. First, we have no real idea of the scale of the increases in taxation that are likely to come through. But we do know that a fall at the top end of the market pulls down the price of properties further down, so we at least know the direction. Higher taxation will inevitably result in lower prices further down the scale.
And second, with one exception, the housing market has not experienced a sudden increase in taxation such as seems likely. That exception is second homes in areas where the council tax on these has been doubled or more. An extreme example is in Gwynedd in north-west Wales, where the average house price dropped by more than 7 per cent in the second quarter of this year. But while prices in Wales as a whole are 4.6 per cent lower than they were at their peak in 2022, they have recovered in recent months and there hasn’t been any recent fall in the number of transactions, in fact the reverse.
My guess, based on the indications we have so far of the scale of tax increases to come, is that at the bottom end of the housing market there will be no significant impact. At the top end, that is for properties of more than £1m, there is likely be a decline of at least five per cent in values over the next two to three years, maybe much more if the tax increases are severe. And in the middle, with the average home price climbing towards £500,000, there could be a decline of up to five per cent.
That gives an indication of the sort of short-term effect that might take place. There is no question that some wealth would be destroyed, and the question is really how substantial the blow would be.
However, to take a more positive view, houses would become more affordable as money incomes continued to climb. For anyone trying to climb up the bottom rungs of the housing ladder that’s good news. And if general inflation does take off again, owning a home will still be a good financial decision.
Need to know
All this, of course, is up for debate; just today, estate agents Savills predicted house price rises of 22.2 per cent over the next five years. However uncertain the future of the housing market is, it can be instructive to look back through its past.
I am fascinated by the long-term trend of house prices relative to earnings, and in particular by the data published by Schoders, the wealth managers, a couple of years ago. These numbers showed that in 2022 houses in the UK had become the least affordable they had been since 1876, at nine times average annual earnings.
House prices fell steadily from 1845 through to 1918, declining from over 12 times earnings to as low as twice earnings by the end of the First World War. Then they settled between four and six times earnings for most of the period from the early 1920s through to the early 2000s.
There were mini-booms and busts, as anyone who bought a home as we did in the 1970s will attest. But looking back, what’s interesting is the broad stability for some 80 years, through the 1930s Depression, the Second World War, the post-war austerity, and the great inflation of the 1970s and 1980s. Prices rose in money terms of course, but not in relation to earnings.
Then there was the steady climb, as homes became less and less affordable. We are living with that now. They have come back a little over the past couple of years, with the most recent tally from the ONS showing that house prices in England and Wales were 7.7 times earnings in 2024.
But that is still way above what seemed to be the normal range from 1920 to 2000, so the really fascinating questions now are these: first, will the Government’s increased charges on homeowners push house prices down in real terms by enough to get them down to that normality? And second, will the adjustment – if it happens – take place more through rising money wages, or through falling house prices?
My very tentative guess for the first is that in the next 20 years prices will come down a bit, but not below the six times earnings mark which represented the least affordable moments of that relatively stable 1920 to 2000 span.
And for the second, the rise will take place through earnings, because I think we will have a lot more inflation than anyone at the moment expects.