NEW COALITION GOVERNMENT DAMPENS MARKET ACTIVITY

In the first half of 2010, theMidtown,City andDocklands residentialmarkets continued to exhibit trends for price and rental growth, trends which were establishedinMarch 2009 for the salesmarket andin July 2009 for the rental market. In the sales market enquiries, sales and price growth were concentrated in the first fourmonths of the year.

Across the three sub-markets ofMidtown, City (property in clerkenwell , property in bloomsbury) and Docklands (property in wapping , property in limehouse), January to April 2010 saw price rises of 6%. Prices had risen for 15 months in Midtown and City and at end June 2010 were only 3% off the September 2007 peak, while in Docklands prices had risen for 12 months from June 2009 and were 8% below peak prices (Figure 1).

Therentalmarket isnormally subduedinthefirsthalfof theyear,peakdemand typicallyoccurringin the secondhalf, particularly the3rdQuarter. In the first half of 2010 therewas evidence of strong rental growth, averaging 7%in each of the three sub-markets.Demand for rental property continued to be artificially inflated, due to the difficulties that “frustrated renters” faced trying to become owner-occupiers.Notonlywasmortgage financedifficult toobtain, in spiteof some easingin the first halfof2010,but alsofirst-timebuyers failedtofindthe
bargains they expected, because a year of cash-rich purchasers pushed prices to near peak levels. Quite simply, renters were outbid and at renewal had to sign newleases at increasedmarket rents.

At the same time the level of rental stock in the market was reduced as landlords, including “reluctant landlords” who had not wanted to sell when prices were depressed in 2008 and 2009, put units into the
sales market in response to rising prices. Confidence in the residential market could, in part, be traced to a modest recovery in the central London employment market, especially in financial services, and that had the effect of maintaining demand for rental property as recruitment levels increased.

Across our sub-markets, where many buyers are either working in financial and business services in Central London or come from an international background, the sales market is very sensitive to national and global economic factors. In May and June the market was more subdued, for the following reasons:

• The uncertainty generated by the UK General Election on 6th May caused a reduction in enquiries from April onwards, with the expectation that, whatever Government came to power, there would be an increased fiscal burden on higher rate tax payers.
• Once in power, the Coalition Government compounded the uncertainty by stating that it would raise the rate of Capital Gains Tax (CGT) on non-business assets including residential property, without specifying the level until the Emergency Budget of 22nd June. Press speculation, fuelled by ministerial statements and
  leaks, indicated that the new rate could be as high as 40-50%.

• The sovereign debt crisis in Greece, and the potential for sovereign debt contagion to spread to other southern and eastern European states, led to widespread concern about the future of the Euro.

• This, and other economic factors, caused the FTSE 100 to lose 12% of its value in three weeks between 15th April and 7th May, the day after the initially inconclusive Election (Figure 2). On 25th May the Index fell by 2.5% to 4,941 after further uncertainty about resolving sovereign debt and the escalation of tension between North and South Korea.

• The Bank of England evidently had little room for manoeuvre, maintaining the Base Rate at 0.5% at each of its six meetings, as well as not extending further the Quantitative Easing programme.

• On 24th May 2010, the new Government announced a £6.2bn spending cuts package which will have a significant impact on GDP in the short to medium term.

• The Emergency Budget heralded an era of austerity as far as public spending was concerned, with a negative impact in the short-term on the rate of economic growth, with GDP forecasts downgraded to 1.2% for 2010-11, rising to 2.3% in 2011-12 and 2.8% in 2012-13.