Brexit to cause UK property ′flash crash′ | Business| Economy and finance news from a German perspective | DW | 17.06.2016
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Brexit to cause UK property 'flash crash'

Property analysts predict a price drop due to tax changes, a fall in the number of ultra-rich buyers and fears about Britain's EU membership. The correction comes amid a housing affordability crunch in London.

British residential property, one of the most resilient investments of the past three decades, is heading for its first fall in six years, several indicators are showing, which could provide a much-anticipated opportunity for many young Britons wanting to buy their first home.

Despite figures released earlier this week suggesting that UK house prices have risen 8.2 percent over the year to April, reaching £225,000 (284,000 euros, $319,000) in England and an eye-watering £470,025 in London, the country's safe-haven status appears to be wavering, in part due to fears about a Brexit in the June 23 referendum on Britain's membership of the European Union.

Seasonally adjusted figures released by the UK tax office, Her Majesty's Revenue and Customs (HMRC), showed the number of property transactions fell more than 45 percent between March and April this year, with sales the lowest they've been in three years.

Prices for prime London real estate have barely moved over the past 12 months. Figures from Knight Frank showed high-value properties in the British capital rose just 0.1 percent in the year to May.

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Only days remain until the Brexit referendum

Similarly, the Royal Society for Chartered Surveyors has also predicted that prices will drop in the short term, and that London is already experiencing a downturn. The latest survey of its members has been seized on as pointing to a so-called "flash crash."

Brexit not wholly to blame

But while British politicians and the media have played up risks to the economy and property prices in the event of Britain leaving the UK, RICS' Chief Economist Simon Rubinsohn told DW the referendum was just one of three main factors leading buyers to stay on the sidelines.

"Other influences fueling a greater measure of caution include the recent change in tax treatment regarding the purchase of investment properties and growing evidence of affordability constraints," he said.

From April this year, HMRC levied an additional 3-percent tax on buy-to-let and second home purchases, the effect of which Rubinsohn said was "most visible" in London due to much higher prices.

While soaring prices have given British owners plenty to crow about, affordability has prevented a whole generation of young Britons from buying their first house, something previously seen as a right of passage.

"Since 2000, house prices have increased 132 percent while average earnings have only risen 51 percent," said Peter Saunders, a visiting Professorial Research Fellow at the London-based independent think tank Civitas.

He told DW that sky-high prices had created a "generational inequality" allowing older, existing owners to make big capital gains, but "at the expense of younger, first time buyers."

Saunders estimated that UK house prices needed to fall by about 30 percent to allow under 40-year-olds to enjoy the same opportunities as their parents.

London boomed as elsewhere collapsed

Many Britons are at a loss to explain why their country has been immune from similar property crashes across Europe and the US after several years of high growth leading up to the 2008/9 financial crisis.

London houses

Now is the time for young Britons to buy their first home, market pundits suggest

While Ireland, Spain, Portugal and even the Netherlands saw falls of 20, 30 or even 40 percent, most of Britain experienced just a short dip before prices quickly recovered. London real estate today costs 60 percent more than before the financial meltdown.

Some property analysts put the rebound down to supply issues, including a lack of new construction. Others attributed the sudden affordability of British property to foreign buyers when the UK government devalued the British pound to stave off the worst effects of the crisis. Russian oligarchs, Chinese investors and Gulf Arab nationals have continued to pour into prime London real estate over the past eight years, helping to skew the average price of homes in the capital much higher.

But over the past 18 months, oil prices have plummeted and the Chinese and Russian economies have stalled, leading many ultra-wealthy buyers to stay on the sidelines.

With so many negative factors arriving all at once, many Britons are asking if property now becomes more affordable and how far prices will fall.

UK property market commentator Henry Pryor told DW while he doesn't expect a full crash, "transaction friction at the top end of the market is dampening enthusiasm and prices."

RICS' Rubinsohn also accepted that for now "demand going forward (for prime London) is unlikely to match the experience of previous years." RICS' survey also suggests many of its members expect further falls in many areas of the country.

'Government meddling'

Saunders from Civitas, a research organization with no political affiliation, insists that the government - and not a shortage of property - is keeping prices high. British Prime Minister David Cameron has trumpeted a scheme to help people purchase property with just a 5-percent deposit, much lower than most lenders require. The government also agreed to backstop up to 20 percent of any "Help to Buy" loan issued.

"Current subsidies are simply increasing demand at a time of excess demand created by irresponsibly loose lending (up to 2008) and ultra low interest rates (since 2008)," he told DW, adding that government schemes are keeping prices artificially inflated.

He called for additional restrictions to prevent landlords buying properties to rent out, although the British government has already vowed to reduce tax incentives for this type of investor.

Fortunately for the much-maligned first-time property buyer, a 30-percent fall in prices has already taken place, according to one metric. The UK government's Office for National Statistics has changed the way it calculates average house prices, so that ultra-expensive homes will no longer skew the figures.

The change means the average cost of buying a home across the UK is now nearly £100,000 lower than the office's previous estimate of around £292,000 pounds.

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