The overwhelming reaction to the Mansion Tax announcement in the Budget was relief. It’s a new tax, and we know which direction they eventually go in, but the High Value Council Tax Surcharge is less punitive than feared.
If it wasn’t so close to Christmas, the prime London market would be going on a full-blown relief rally.
The certainty means that deals previously on hold are now taking place, although there aren’t many new transactions starting three weeks before the festive break.
There is probably a lesson in there somewhere for the Chancellor about creating the right conditions for growth.
HOUSE PRICE IMPACT
The impact of the Budget on house prices in recent months has certainly been clear. Nationwide and Halifax both reported that UK annual growth approached zero last month, hindered by the endless rumours about which taxes would rise.
Average prices in prime central London, a market at the sharp end of the speculation, fell 4.3% over the same 12 months. It was the widest decline since February 2021, a time just before prices began to rise during the pandemic-era stamp duty holiday.
DOMESTIC BUYERS
In prime outer London, the annual change was negative for the second successive month, falling to -0.3%, the lowest figure since July 2024, the month of the general election.
The outer London market is more driven by needs-based domestic buyers but has its fair share of properties that will qualify for the new council tax levy. Richmond, for example, has just over 7% of the 150,000 properties worth more than £2 million in England and Wales, Knight Frank calculations show.
Hammersmith & Fulham has 4.5%, while Merton has 3.5% and Wandsworth has 2.9%. Meanwhile, Camden has 6.9% and Islington has 2.2%. For comparison, Kensington & Chelsea has 18.5% and Westminster has 12.4%.
While some buyers waited for the Budget before acting, others accelerated their plans before 26 November.
The combination of the two meant sales volumes rose last month across London. The number of exchanges was 5% higher than the five-year average in PCL and POL. For properties above £5 million, the increase was a more notable, and perhaps understandable, 21%.
POLITICAL RISK
Now there is economic clarity, the biggest near-term risk facing the market is political. It seems to be a working assumption for a growing number of people that the Chancellor and Prime Minister will lose their jobs after the local elections next spring.
Rejection at the ballot box in 2026 could be interpreted by some inside the Labour Party that voters want the government to accelerate its tax and spend plans.
It’s an assumption that may well be rejected at the ballot box itself, but only in 2029 at the general election.
Budget seeks to tame inflation but sets stage for higher rents
Meanwhile, for a government so concerned about inflation, it appears relaxed about the prospect of rising rents.
The Chancellor announced a two-percentage point increase on rates of rental income tax. Savings and dividend income will be increased by the same amount.
There were disinflationary measures in the Budget, including on energy costs and rail fares but tenants must now be left wondering if their overall monthly outgoings will increase.
The economic rationale is simple. As the tax burden on landlords increases, more will sell, supply will fall and rents will rise. For those landlords that remain in the sector, any extra costs may need to be passed on.
In the words of the Office for Budget Responsibility alongside the Budget: “This successive eroding of private landlord returns will likely reduce the supply of rental property over the longer run. This risks a steady long-term rise in rents if demand outstrips supply.”
There is already evidence of upwards pressure on rents in prime London markets.
Average rental values in prime central London (PCL) increased by 1.8% in the year to November. In prime outer London (POL), there was a rise of 2.2%.
A NOVEMBER HIGH
Taking out the distortive effects of the pandemic, it was the highest November reading in PCL since 2014. On the same basis, rental value growth in November was last higher in POL in 2011.
Other changes on the horizon include the Renters Rights Act, which will create uncertainty around setting rents, repossessions and the sale process for landlords when it comes into effect in May.
“In the majority of cases, landlords are happy to manage the changes the Renters’ Rights Act is bringing, but further margin erosion from an already low base will drive them away from the sector,” said Gary Hall, head of lettings at Knight Frank.
“Losing control of an asset that isn’t generating any return is far from a good investment, and one that will be sold quickly.”
The growing financial burden means more landlords are exploring the option of setting up a company, although that is not a straightforward process.
That said, for those landlords staying in the sector, rental yields are increasing as a result of rising rents and price declines.
Rental value growth has been particularly strong in recent years, due to the pandemic and supply shortages. New rental listings in PCL and POL in the first ten months of this year were 9% below the five-year average, Rightmove data shows.
Average rents have risen +35% since November 2019 in prime central London, which compares to a figure of 2% over the preceding 6 years.
In POL, rental value growth of 33% over the same period compares to just 8% in the six years prior to Covid.
Tenants were already feeling squeezed before the Renters Rights Act and this November’s Budget made the outlook tougher.
