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Last Updated: Jun 02, 2016




Housing market activity in the UK surged during the first quarter of 2016, partly due to upcoming Buy-to-Let stamp duty surcharges.

The average house price in the UK rose by 5.3% (5% inflation-adjusted) to £198,564 (US$ 286,806) during the year to Q1 2016, according to Nationwide. This followed y-o-y price increases of 4.26% and 3.67% in Q4 and Q3 2015, respectively.

The highest price rises took place in the Outer Metropolitan Area around London, with house prices increasing by 11.9% y-o-y in Q1 2016, followed by London (11.2%), Outer South East (8%), South West (5.5%), and East Anglia (5.4%).

The North West barely increased at 0.2%, while both North (-1.4%) and Scotland (-0.5%) experienced annual price declines.

"There has been a pickup in housing market activity in recent months, with the number of housing transactions and mortgage approvals rising strongly," said Nationwide's Chief Economist Robert Gardner.  "This is likely to have been driven, at least in part, by upcoming changes to stamp duty on second homes, where buyers have brought forward purchases in order to avoid the additional tax liabilities."

"The pace of house price growth may moderate again once the stamp duty changes take effect in April."

Dangers ahead for the UK property market
The 3% increase in stamp duty came into effect in April 2016.  This applies to all Buy-to-Let purchases, and is on top of already-high existing Stamp Duty rates.  It means that a landlord considering spending £1,000,000 for a normal-sized house to convert it into 5 flats now has to pay Stamp Duty of £73,750, or 7.4% of the purchase price, in addition to other transaction costs. 

A further hit to the London property market may result from anti-money laundering steps likely to be taken against foreign property owners in the wake of the Panama Papers revelations, which highlighted the role of the London property market as a destination for dirty money.  These steps are a worry for the market, as large swathes of top-end central London property are now owned by foreign investors buying through companies, many of whose owners will not be happy to be under scrutiny.

Finally a large-scale extension of the right-to-buy at highly discounted prices is planned for 1.5 million Housing Association tenants. This is likely to have a significant impact on the lower end of the housing market.

House prices are already declining in some central parts of the capital, and the trend is expected to continue over the next three months, according to the RICS's UK Residential Market Survey report in March 2016.

Despite that, price expectations for the next twelve months remained positive in the RICS survey, and strong price growth is also predicted across all other parts of the UK in 2016.

Despite very high price to income ratios in London and cities in the South East and South West, UK house prices are boosted by four factors:
  • Immigration and population growth have been strong, especially in London.
  • Interest rates have been at record lows, with a large expansion of the money supply through “quantitative easing”.
  • The City of London (London’s financial centre) continues to boom.
  • Construction activity remains weak. Dwelling starts rose 3.8% y-o-y to 166,900 units in 2015. Dwelling completions increased 10.2% y-o-y to 152,440 units, according to UK’s Development for Communities and Local Government.

To relieve pressure on the housing stock, earlier this year (January 2016), Prime Minister David Cameron announced the government's intention to remove around 100 most run-down housing estates in the country and replace them with high quality homes.

United Kingdom house pricesThe government also stated that it will commission thousands of new affordable homes in 2016. Out of the 13,000 homes included in the first wave, 40% will be 'starter' homes, and will be located in four sites outside London. Also, a £1.2 billion (US$ 1.73 billion) starter home fund has been activated, which will be used for the preparation of brownfield sites for new homes. This aims the creation of 30,000 starter homes and around 30,000 market homes by 2020.

There are no restrictions on foreign ownership of properties in the UK.

Analysis of United Kingdom Residential Property Market »


RENTAL YIELDS
Last Updated: Jun 18, 2014



London's residential prices keep rising, with daily press warnings that the city is overvalued. It is by any measure extraordinarily expensibe.

Prices per square metre (sq.m.) of apartments in Prime Central London (PCL) range from GBP 16,800 to GBP 25,000, with bigger apartments tending to cost more.

A 120-sq.m. apartment costs on average GBP 2,500,000

A 250-sq.m. apartment in Prime Central London costs around GBP 6,200,000.

Monthly rents per sq. m. range from around GBP 51 to GBP 64. This means that a 120-sq.m. apartment lets for around GBP 6,600 per month, while a 250-sq.m. apartment rents out for around GBP 16,000 per month. As a reminder, these are not typical London rents - this is Prime Central London.

Average square metre prices in the other luxurious areas of London range from around GBP 14,700 to GBP 19,000. A 120-sq.m. apartment here costs on average, GBP 18,800 per sq. m. or about GBP 2,250,000 to buy. Monthly rents per sq. m. range from around GBP 41 to GBP 44. Even so, a 120-sq.m. apartment in these areas can typical rent for around GBP 5,000 per month.

In Prime Central London, rental yields range 3.08% to 3.65%, whereas in the other luxurious areas of London, rental yields range from 2.72% to 3.20%.

However these figures may be somewhat misleading. because of London's size and its position as a global centre, its flavour-of-the-month quality with Russian, Middle Eastern and Chinese buyers, neither of these two central London zones that we cover are truly representative.

If you look the sources of the data in our table, you will see that some of these 'other luxurious areas' are very luxurious indeed. South Kensington for example is placed here.

A possibly more realistic impression is given by the figures from Association of Registered Letting Agents (ARLA), which suggest that gross rental yields in Prime Central London are 4.37%. Arla's estimated yields in the rest of London are 4.74%. These estimates are taken from a database of active buy-to-let landlords, and are likely to represent a good assessment of the real situation.

Foreign residential property investors in Britain face a rising rumble of dicontent from the British public about exorbitant housing prices in London, which rightly or wrongly is partly blamed on the large numbers of foreign buyers, as well as the continuous flow of immigrants into London. Both are hot-button issues.

One result is that foreign buyers will soon be liable to capital gains taxes when they sell their UK properties (previously they were exempt). Another is that stamp duty has been ramped up on higher-end properties. There is talk of further measures - it is widely agreed that Council Tax is too low on high-end properties, and the Liberal Democrats have been agitating for a mansion tax.

Round trip transaction costs are higher in the UK now than they were in the past, especially in London given higher stamp duties on expensive properties.  See our UK residential property transaction costs analysis and our Residential property transaction costs in UK compared to other countries.

Read Rental Yields  »



TAXES AND COSTS
Last Updated: Sep 24, 2015



Rental Income: Unless nonresidents take specific steps, they will be taxed on net rental income ssourced from the UK at a flat rate of 20%, which must be withheld by the tenant or letting agent. However, effective tax rates can be brought down to around 9% with all the allowable deductions.

Capital Gains: Capital gains are taxed are taxed at progressive rates, from 18% to 28%.

Inheritance: Estates or assets exceeding the current tax threshold of £325,000 (€439,982) are subject to inheritance tax at 40%. In calculating the amount of the estate, the value of any gifts made by the deceased within 7 years of death must be added (some small gifts are exempt).

Residents: UK residents are taxed on their worldwide income and on capital gains from disposal of their UK assets, and most likely on their overseas properties too.

Read Taxes and Costs  »



BUYING GUIDE
Last Updated: Sep 22, 2015



Total roundtrip transaction costs range from 3.90% to 12.16%. Almost all buyers, UK-based or not, employ lawyers as well as real estate agents. Legal fees are around 0.5% to 1% while agent's fees are around 2% to 3.5%, plus 17.5% VAT.

Read Buying Guide  »



LANDLORD AND TENANT
Last Updated: May 25, 2006



Rents: Landlords and tenants can freely agree on rent levels. They can freely agree any mechanism of increasing rent levels. Deposits are lawful.

Tenant Security: Contracts naturally revert to a standard monthly contract which, after an initial six month's period of security of tenure, allows the tenant to be evicted at two months' notice. However in practice the eviction process can disadvantage the landlord.

Read Landlord and Tenant  »



ECONOMIC GROWTH
Last Updated: Jun 02, 2016


Economic slowdown expected later in 2016; Uncertainty over UK's upcoming in-out referendum

United Kingdom luxury homesThe UK is still in recovery after being affected by the global financial crisis in 2008. In 2015, the UK's real GDP grew by 2.2%, according to the International Monetary Fund (IMF)., a slowdown from the 2.9% economic growth posted in 2014 and the slowest pace of annual growth since 2012. However the GDP growth per capita figures are less impressive.  In 2015 GDP growth per capita was 1.42%, in 2014 it was slightly higher at 2.04%, in 2013 it was 1.55%, and in 2012 it was 0.51%.

In general, the UK´s recovery since the recession has been anaemic, at best. In previous recessions, there was above average growth. For instance in 1983 GDP grew by 4.2%, and in 1994 by 3%. Despite that, the UK remains one of the developed nations' fastest growing economies. Its growth mostly relies on the services sector, according to Office for National Statistics (ONS).

During the first quarter of 2016, GDP rose by 2.1% y-o-y, and by 0.4% from the previous quarter. The IMF expects the UK's economy to slow to 1.9% growth during the full year 2016.

"Uncertainty over ‘Brexit’, weak overseas growth and financial market volatility are all creating an unsettling business environment and point to downside risks to the economy in 2016," according to data company Markit's chief economist Chris Williamson.

United Kingdom GDP Unemployment"It definitely increases uncertainty," said Ricardo Reis of London School of Economics. "There are few other political events that would have such a direct and immediate effect on the economy, and especially on international capital and trade flows. I would further expect that investment of firms based in the UK with significant international relations is delayed until the outcome of the referendum is clear."

In February 2016, the UK's overall unemployment rate was 5.1%, down from 5.6% a year earlier, according to the ONS.

The country's annual inflation rose by 0.5% y-o-y in March 2016, up from 0.3% in February. Although still relatively low in the historical context, inflation was observed to have been gradually rising since October 2015, according to the ONS.

After the UK's local election on May 5, 2016, London named  Sadiq Khan, an actively affiliated Muslim,  as the city's newest mayor. Khan, a member of the Labour Party, succeeded Conservative Party Mayor Boris Johnson.







  • Generally low transaction costs
  • Low to moderate income taxes
  • Very high prices
  • Affordability stretched
RESIDENTIAL PROPERTY FACTS
Price (sq.m): €25,575 For a 120 sq. m. property, usually an apartment.
Rental Yield: 3.21% For a 120 sq. m. property, usually an apartment.
Rent/month: €8,213 For a 120 sq. m. property.
Income Tax: n.a. Assumptions: Owners are a non-resident couple drawing US$ / €1,500 per month in rent, with no other local income.
Roundtrip Cost: 8.03% The total cost of buying and then reselling an apartment. Includes:

* all transaction taxes and charges:
* lawyers' and notaries' fees
* agents' fees

Assumptions: The buyers are non-resident foreigners. The apartment cost US$250,00 / €250,000.
Cap Gains Tax: 28.00% Assumptions: The property was bought for US$250,000 / €250,000, and sold 10 years later, after a 100% appreciation.
Landlord and Tenant Law: Pro-Landlord Rating is based on a detailed study of each country’s law and practice.

Baltics Real Estate Market Overview 2016 - Colliers InternationalPoland Residential Market Q2 2016 REAS
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