_Letter from London, July 2018

In June this year, prime central London prices had fallen 9% from their previous peak in mid-2015, a decline that suggests the market has now factored in higher transaction taxes.

Increased rates of stamp duty, which came into effect in December 2014 and April 2016, have certainly curbed trading volumes and led to price declines in recent years.

However, based on a sample of £1million-plus sales in the first six months of this year, it would seem that price adjustments have more than compensated for higher transaction costs.

In the sample of several hundred sales, the average difference between the old and new rates of stamp duty as a percentage of the sale price was 1.97%. This rose to 4.97% when a 3% surcharge for second homes and landlords was added (which was the April 2016 change). 

For example, the extra stamp duty on a £1.7 million second home is £83,750, which equates to 4.9% of the sale price. Meanwhile, average prices for £1 million to £2 million homes fell 9.3% in the two years to June. 

Despite this over-compensation, the forecast for price growth is modest and trading volumes are no more than stable, which indicates there are other forces are at play.

As highlighted during the recent visit by the US President to the UK, political uncertainty is one key factor. 

Talks between the UK and EU are taking place against a relatively fluid political backdrop in London and recent ministerial departures mean questions have inevitably been raised about the durability of the UK government.

Sentiment has therefore become a more important driver of demand, which makes the future direction of the London property market less predictable.

So, what is likely to happen next in UK politics? 

The concerns of Brexiteer lawmakers centre on the negotiating position of the UK government, which they believe cedes too much grounds to the European Union.

While it would only take 48 of them to trigger a vote of no confidence in the prime minister, this has not happened yet. The likely reason is that the Brexiteers would not win the vote and would not be able to mount another challenge for 12 months under Conservative Party rules. 

So, the Brexiteers are biding their time?

For now. Their aim is to make the government adopt a tougher negotiating stance, seeking to capitalise on the fact that it only has a slim majority in the UK Parliament. However, this risks raising tensions among Remain supporting lawmakers, who could also cause a Parliamentary headache for the government. 

Is another general election coming?

Not necessarily. Under the fixed-term Parliament Act, the next general election is scheduled for 2022. However, if Theresa May feels she has lost the confidence of a majority of her own lawmakers or Parliament reaches a legislative deadlock, she could call a general election, but this would require two-thirds of MPs to support it. 

However, there are growing calls for a second Brexit referendum, which the government has so far ruled out.