London housing sales struggle as multiple issues put off buyers

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Real estate companies have admitted that a slowdown in sales has affected their profits.

The London real estate market is losing steam with sales struggling to complete.

Tax changes, Brexit uncertainty, higher house prices and difficulties in getting a mortgage approved are making it increasingly harder for people to buy homes in the U.K. capital.

Real estate companies have admitted that a slowdown in sales has affected their profits. London-focused chain Foxtons reported a loss of £2.5 million for the first half of the year, compared to a profit of £3.8 million a year earlier. Savills also said Thursday that residential transactions fell 7 percent in London during the first half of 2018, denting its profits. These were down by 18 percent in the first half of 2018, from a year ago.

Data from Reapit Group, a real estate software company, showed that, on average, houses in the Greater London region were withdrawn from sale after 5.7 months. Almost two-thirds of London properties for sale that departed the market in 2017 were withdrawn, not sold.

According to Gary Barker, chief executive at Reapit, 38 percent of the London-based withdrawals had actually received an offer from a prospective buyer but, in most cases, these were never accepted "indicating that offers fell below the selling price."

"The market might be constraining because buyers think they should get a good deal due to Brexit fears and sellers not wanting to drop their prices," he told CNBC via email.

A flurry of problems

People's perception of the property market is one the of the main reasons for sluggish sales, Sam Cullen, U.K. housebuilders analyst at Berenberg, told CNBC.

He said that changes in stamp duty — a tax on purchased properties — are also affecting sales. "If you buy a £1.4 million flat, you have to pay an additional £20,000 in tax duty compared to pre-2014."

More recently, the current government announced in November that first-time buyers buying a home of up to £300,000 would be exempted from stamp duty. As a result, Cullen said, people are staying in the rental market for longer, saving up to buy a bigger first home while avoiding stamp duty.

At the same time, buyers are being put off by uncertainty regarding the U.K.'s withdrawal from the European Union, which is due to take place on March 29. There's currently no agreement in place as to Britain and the EU's relationship after that date.

A number of political and market events last year intensified the drop in house sales. These included the start of the negotiating process that will take the U.K. out of the EU, a snap election in May, and the first increase in interest rates since the financial crisis in November. According to Reapit's data, withdrawals of property from the London marketplace peaked in May and November; traditionally, withdrawals peak in July and November.

"The number of sales in London fell by 9 percent in 2017 compared to 2016 — and the weakening had already begun in 2016," Reapit said in its report. House transactions also fell in the capital due to higher house prices, which grew about 1.1 percent in that year compared to an average of 4.6 percent across the U.K.,the company said.

"The supply from landlords selling is also impacting the market as we will see landlords either selling or renting the property out, speculating around house prices and trying to maximize their taxed earnings," he added.

Renting is getting even more expensive

Amid the flurry of issues in the sales market, people are opting to rent for longer.

Data published Thursday by the Royal Institution of Chartered Surveyors (RICS) showed that rents continue to rise and could increase by as much as 15 percent by 2023. Not only is there a short supply of properties on the market, but people are reluctant to buy a house due to Brexit and the changes in taxes.

Where is the London sales market struggling the most?

The data from Reapit showed that boroughs offering more premium properties are the ones struggling the most with house sales.

Hammersmith and Fulham, Kensington and Chelsea, Westminster and Camden saw the highest property withdrawal rates in 2017.

"Even lower-priced homes in these boroughs had a higher than average withdrawal ratio. An analysis of homes priced between £250,000 and £500,000 had a 52 percent withdrawal ratio compared to a 41 percent national average," the report said.

According to April data by London Central Portfolio, a research company, property millionaires shouldered a big chunk of stamp duty payments in 2017.

London's luxury property market has often appealed to foreign buyers seeking an investment opportunity rather than a home to live in. According to Cullen from Berenberg, the appetite to buy a house in London will not suddenly disappear. "Prices are about 10 percent cheaper than before the Brexit vote," he said, adding that the depreciation of sterling is attractive for foreign buyers.

Sterling depreciated on the back of the vote to leave the EU in June 2016. As a result, London property became cheaper for foreign buyers.

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