Knight Frank has revised its forecast for prime central London house prices to a predicted 1% decline this year. This marks a shift from their earlier January prediction, which optimistically forecasted a 1% rise. This adjustment comes in the wake of political developments, including the announcement of a General Election by Prime Minister Rishi Sunak, set for July 4th.
The Impact of Non-Dom Rule Reforms
The anticipated reform of non-domiciled (non-dom) regulations has injected a dose of caution into London’s high-end property markets. Since the proposal of these changes in March, there’s been hesitation among investors and homebuyers in the prime segments. Under the existing rules, non-dom residents can live in the UK without paying taxes on their global income. However, Chancellor Jeremy Hunt has proposed a cap on this exemption at four years, sparking a wave of uncertainty. Labour, not to be outdone, has suggested even stricter regulations, details of which are yet to be fully outlined.
Tom Bill, Knight Frank’s head of UK residential research, explains, “The dual uncertainty from both major political parties regarding non-dom regulations and the impending general election has understandably resulted in hesitance in the property market.”
Rental Market Adjustments
Not only have the sales forecasts taken a hit, but rental expectations have also been scaled back significantly. The growth forecast for prime central London rents now stands at a modest 2%, a sharp fall from the previously expected 5.5%. Similarly, the growth forecast for prime outer London has been reduced to 2.5%, down from 4.5%.
Bill highlights potential regulatory changes that could further complicate the market: “The introduction of some form of Renters Reform Bill seems imminent, which would shift the balance of power towards tenants, influencing landlord decisions and market dynamics.”
Underlying Challenges in the Rental Sector
Despite these adjustments, the rental market’s foundation appears robust, underpinned by a structural shortage of rental housing coupled with a competitive job market, high levels of immigration, and rising mortgage costs. However, supply levels, although slightly improving, remain tight. Oliver Knight, head of residential development research at Knight Frank, commented, “It’s unlikely that the rental supply will increase significantly in the near future to affect headline rental growth markedly.”
The buy-to-let (BTL) sector is feeling the squeeze from rising interest rates and tax changes, prompting some landlords to exit the market. Meanwhile, although the supply from build-to-rent (BTR) developments is on the rise, it is not sufficient to replace the homes lost in the BTL sector.