Market in Depth

UK's housing market remains subdued, amidst uncertainty surrounding Brexit

Lalaine C. Delmendo | November 28, 2019

House prices in UK are still rising, at least in nominal terms (i.e. not adjusted for inflation). But uncertainty over Brexit and the upcoming general elections are now clouding the housing market's prospects.

The average house price in the UK rose by a meagre 0.3% to £216,805 (US$ 276,968) during the year to Q3 2019, according to Nationwide - a slowdown from last year's 2.1% growth. It was the lowest annual increase since Q1 2013. When adjusted for inflation, house prices actually fell by 1.4% y-o-y in Q3 2019.

London registered the biggest house price decline of 1.7% (-3.4% inflation-adjusted) during the year to Q3 2019 - the ninth consecutive quarter of price falls in the capital city, with double-digit declines for some top-end central London properties. Despite these declines, London's prices are still more than 50% above 2007 peak levels.

The Outer Metropolitan Area around London and the Outer South East also recorded house price falls of 1.5% and 0.6%, respectively (-3.2% and -2.4% in inflation-adjusted terms).

The highest price rise was in Northern Ireland, with house prices rising by 3.4% during the year to Q3 2019 (1.5% inflation-adjusted). It was followed by Wales (2.9%), North West (2.5%), West Midlands (2.1%), North (2%) and East Anglia (1.7%). Regions with weaker price rises included the Scotland (0.8%), South West (0.5%), East Midlands (0.4%) and Yorkshire and Humberside (0.1%).

Demand continues to fall. In the first three quarters of 2019, residential property transactions completed fell by 1.1% from a year earlier, following annual declines of 2.3% in 2018 and 1.2% in 2017.

“We remain unchanged from our view that activity levels and price growth will remain subdued while the UK navigates political and economic uncertainty,” said Russell Galley, managing director at Halifax.

However the chronic housing shortage will prevent a significant drop in prices, according to the Royal Institution of Chartered Surveyors (RICS). Property transactions are expected to fall by about 5% in 2019 from a year earlier. 

“October has been full of political twists and turns, and with Brexit uncertainty ongoing, many buyers and sellers have adopted a 'wait and see' approach,” said Jerald Solis of Experience Invest.

United Kingdom house prices
The UK economy is expected to expand by 1.3% this year, down from 1.4% in 2018 and the slowest pace since 2012, according to the Bank of England.

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


Analysis of United Kingdom Residential Property Market »

Rental Yields

London's yields are low

London´s residential prices have been falling in the higher-end districts. But London remains by any measure extraordinarily expensive.

That impacts rental returns, since rents have not risen as much as prices. Gross rental yields, i.e., the gross annual rental return on an investment in an apartment if fully rented out, are now quite low in London.

On the whole, rental returns are better on the prime fringes than in central London. 

Yet surprisingly, in the centre, larger apartments sometimes have higher yields - particularly in the more expensive districts of London. This defies the almost universal rule in other cities that smaller flats have higher rental returns. Why is it now different in London? Because of the UK´s amazingly high stamp duties on super-expensive property purchases, which are dissuading high-flyers from buying. People prefer to rent if they are staying just a few years, because the total costs of renting high-end properties are lower than the total costs of buying and then selling them. High capital gains taxes on sale, and worries about Brexit, reinforce the message that in London, renting now makes sense for the rich.

Foreign residential property investors in Britain have long faced a rising rumble of discontent 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 are now 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

Effective tax rates are moderate in the UK

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 (€433,333) 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

Roundtrip transaction costs moderate in Britain, can be high on high-end properties

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

UK law is pro-landlord

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

Slower expansion expected in 2019; Withdrawal Agreement still in limbo

United Kingdom luxury homesThe UK economy grew by 1.4% in 2018 from a year earlier, down from a growth of 1.8% in 2017 and the slowest pace since 2012. Then in Q3 2019, the economy expanded by a minuscule 1% from a year earlier, according to the Office for National Statistics (ONS) - the lowest y-o-y growth in almost a decade.

The UK’s GDP growth per capita figures are also unimpressive. In 2018, GDP growth per capita was 0.8%, according to the International Monetary Fund (IMF).

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%. This compares to an annual average growth of just 1.9% from 2010 to 2018. The UK’s growth mostly relies on its services sector, according to the ONS.

Recently, the Bank of Englandslashed its economic growth forecast for 2019 to 1.3%, from its earlier projection of 1.5%.


United Kingdom GDP inflation
The UK was originally scheduled to leave the EU on March 29, 2019, two years after Prime Minister Theresa May triggered Article 50 – the formal procedure to leave the EU and start the negotiation process. May stood down as Conservative Party leader in June 2019, and in July Boris Johnson became the new prime minister.  The EU has agreed to a further extension until January 31, 2020.

Any deal that the UK strikes with the EU is now heavily dependent on the outcome of the general elections to be held on December 12, 2019. If Johnson’s Conservative Party wins a parliamentary majority, UK will be on track to leave the EU on January 31 and the reduced uncertainty is expected to boost business and investor confidence. However, if no party was to gain a majority, the UK economy is expected to remain in limbo with higher chances of further delays and possibly a second referendum.

In Q2 2019, the UK’s overall unemployment rate was at 3.9%, slightly down from 4% a year earlier, and the lowest level since 1974, according to the ONS.

The UK’s inflation stood 1.7% in September 2019, down from 2.2% a year earlier, amidst a slowdown in transport costs due to the decline in fuel prices.