Coalition calm set to be conducive to bricks and mortar

New government policies will stimulate the housing market and prices will strengthen as a result of growing confidence

Stuart Law
STUART LAW CHIEF EXECUTIVE ASSETZ

The formation of the coalition government is beginning to signal a new period of calm for the industry.
After the fear I expressed in last month’s article that a hung parliament could destabilise and devalue the pound thankfully this appears not to have happened.

The country’s first hung parliament since 1974 did result in a brief period of uncertainty at home, but this was overshadowed by continued chaos in the eurozone.

So rather than witnessing a fall euro, instead we have seen sterling revised upwards.

As a result, now is proving to be an excellent time for investors looking to buy property abroad. Those who already own property in the eurozone – renting it out in sterling and paying their mortgage and bills in euros – will also be able to cash in on the euro’s weakened state.

As in the UK, the number of new development starts is down and unlikely to reach previous levels for a long time.

Inevitably, it won’t be long before the laws of supply and demand begin to kick in, as they have in the UK market.

The pound’s continued strength is also likely to affect the property market at home. As the amount of foreign money being injected into the UK begins to fall, the growth rate of prime London property will become more measured – possibly even falling in the short term.

Nationally, House Price Watch, an amalgamation of the five major UK indices – CLG, Nationwide, Halifax, Acadametrics and Rightmove – also continues to point to a reduction in the growth rate. Annual house price growth is currently high, but the rate of growth is slowing to a more sustainable level.

Many of the new government’s policies have yet to be revealed. But I expect to see house prices continue to strengthen over the next few months as the shift in power to the coalition engenders increased confidence in the market.

Those who already own property in the eurozone will be able to cash in on the euro’s weakened state

The Bank of England’s decision to keep the base rate at 0.5% for the 14th consecutive month will also help keep the market buoyant. I expect this rate to continue for some months to give the market the boost it needs.

Further help in stimulating the market will be provided by the Conservatives’ promised abolition of Stamp Duty for first-time buyers as well as by higher LTV mortgages from the banks.

But the recent proposal to increase Capital Gains Tax on non-business assets is likely to have a negative impact on property investment in the UK. To secure a full recovery for the property market we need to drive investor activity. This can be achieved only through the continued stability of the current 18% tax rate.

Any exorbitant increase on the tax rate, with current figures suggesting it could reach as high as 50%, will only slow economic growth and hamper the government’s promise to revitalise the economy.

Although the proposed CGT increase comes as a damning blow for investors, and some will seek to sell before the increase, I still expect to see continued investor activity in the property market.

Few other asset classes offer the security and returns of UK residential property, and long-term investors will continue to see the benefits.