"Average prices in PCL are down by 18% since the last peak in August 2015, which means there is a strong relative value argument for buyers"
- Tom Bill - Knight Frank
Chancellor Rachel Reeves spoke recently about the need to remove the barriers to economic growth. However, adjusting the height of a barrier is futile when there is no incentive to jump over it.
You can “fix the planning system” but housebuilders won’t build unless there is sufficient demand. Rising mortgage costs since October’s Budget have made the government’s aim of building 1.5 million homes during this Parliament even more challenging.
The wrong end of the telescope is also being looked down in relation to foreign investors.
The government plans to amend the so-called Temporary Repatriation Facility (TRF), which is one element of its new residence-based scheme for non-doms. Under the TRF, investors have a three-year window to bring overseas funds into the UK at low rates of tax.
Widening the TRF window would be a welcome move, but only if investors feel tempted to go through it. The red line for 83% of non-doms surveyed by Oxford Economics is making overseas trusts subject to UK inheritance tax and that remains the key stumbling block.
In fact, choosing to focus on the TRF makes you wonder why the government is concerned about a scheme that doesn’t start until April.
Until the inheritance tax issue is addressed, expect more media stories about foreign investors leaving the UK for places like Italy, Switzerland and the Middle East.
The non-dom proposals are part of the Finance Bill, which is currently going through Parliament. Amendments may still be tabled by the government or opposition parties and the final legislation will take shape in coming weeks. In addition to the issue of inheritance tax, an Italian-style flat tax may also be discussed.
As a result of this political uncertainty and rising borrowing costs since the Budget, demand in the prime London property market is subdued.
The number of new prospective buyers registering in London was 8% below the five-year average in the second half of 2024, Knight Frank data shows. The number of offers made was down 11% over the same period.
January has brought financial market volatility over concerns around AI technology and questions about the tariffs that Donald Trump could impose, which means it has been a good moment for safe-haven assets like gold.
Fifteen years ago, this volatility would also have boosted investment in prime central London (PCL), which became a safe haven after the global financial crisis.
Average prices in PCL are down by 18% since the last peak in August 2015, which means there is a strong relative value argument for buyers. The annual change was -0.8% in January, which is an improvement on a figure of -2.3% recorded 12 months ago, largely thanks to the more favourable rate environment that materialised in the middle of last year.
Rates have risen since the Budget due to government plans to borrow and spend more, although the equity sell-off last week provided a minor respite as demand for bonds rose and yields came down slightly. Markets even priced in three Bank of England rate cuts in 2025 during the stock market turmoil last Monday, although those expectations have cooled slightly since.
Meanwhile, activity remains relatively stronger in prime outer London (POL). The number of exchanges in POL was 10% higher than the five-year average in the second half of 2024, which compares to a 3% increase in PCL.
Average prices rose 1.4% in the year to January, up from a decline of 1.5% 12 months ago in a market where demand is fuelled to a greater extent by buyers who need to move for reasons including schooling and employment.
Overall, price growth has been largely flat for four years in PCL and for two years in POL. However, as financial markets showed us this week, demand can rise quickly when there is an incentive.
