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Wealthy Foreigners Shunning London Property Market – Exodus Ahead?
Posted On 26 Apr 2015
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EXODUS, MOVEMENT OF RICH PEOPLE
Over the last few years we have written a number of MACRO pieces on property as an asset class. Previous articles can be re-read here, here and here. All these articles articulated and explained our negativity.
This piece looks at one of the biggest property bubbles, London. Looking at a longish term graph of UK property we see the following:
The problem with the above graph is that is measures the rise of total UK property. What we want to know is how has London property behaved over this period? We can answer this question by looking at it the other way around. How has property in the UK excluding London performed over the period?
The answer to that question is? Not much unfortunately. According to official Land Registry figures the average property value in the UK currently stands at £133,538. In 2004 the figure was £133,126.
The graph is therefore a conservative and reasonably accurate depiction of how London prices have performed. The problem with the graph is that it represents all property types. In London however it is almost entirely driven by the high end, which has become, alongside the US ultra luxury property market, the new “Swiss bank account”, a mostly anonymous place with LLC’s and offshore companies buying on behalf of ultra rich foreign tax evaders where they can park their cash, with the government’s blessing.
The party is now coming to an end.
As the Financial Times reported “sales of homes worth more than £2m have dropped by 80% in the past year, according to estate agent Douglas & Gordon.”
Ed Mead, a director of Douglas & Gordon estate agents, said his company had carried out 37 valuations in the past month for owners of high-end homes who were thinking of selling up, when the normal level is about six.
According to top end real estate agent Knight Frank; “House price growth in London’s priciest areas has flatlined during the past six months, for the first time in five years. Rents are rising strongly as the capital’s wealthy eschew buying and choose instead to rent.”
Why are wealthy foreigners shunning London? According to the press, estate agents, brokers etc there are three main reasons:
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The Labour Party’s pledge to end “non-dom” status for rich foreigners if they win the general election. Non-dom means that UK residents who have their permanent home (‘domicile’) outside the UK do not have to pay UK tax on foreign income.
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The Labour Party’s pledge to introduce a mansion tax on high-value homes if elected.
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During the past two years the government has made tax changes that have increased the burden on the affluent. A new capital gains tax came into effect on the 6/4/14 taxing the proceeds of property sales.
The rich know when they are not welcome. They therefore begin to leave. If they all leave at the same time, what happens? An illiquid market becomes even more illiquid. In the worst case scenario it could even become bidless. A bidless London top end property market will be marked by lots of ‘For Sale’ signs.
What are the consequences of this? Firstly we start by blaming the government, the same government that everyone loved when it was encouraging speculative gambling in every asset class.
Secondly expect London house prices to crash in the coming months as every seller suddenly realizes that” he who sells first, sells best” especially with the taxman glancing over his shoulder. Once London prices tumble UK housing tumbles. Then watch as the entire economy follows suit, and leads to another episode of QE from the BOE.
In a world addicted to constant money flow from “outside” sources, if the wealthy refuse to be taxed, then the central bank will have to provide the funding on its own.
We have warned of this.
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