London Real Estate: Why Now Is the Time to Buy

ON-BO072_PenRea_F_20151118171540Ever fantasize about owning an elegant Georgian townhouse in London? Current conditions for buying a second home in the heart of that great city haven’t been this good since the 2008 recession. In the year ended in September, prices for homes valued from three million to five million pounds ($4.6 million to $7.7 million) in Central London, which runs from Chelsea to Westminster, fell 5.1%, and houses above £5 million fell 5.5%. That’s a buying opportunity.

Lucian Cook, residential research director at real estate broker Savills, says the Prime Central London housing index fell 22% during the financial crisis. By June 2009, prices were on the rebound, with wealthy nationals from Russia to Egypt coming to London to create havens for their families. According to Savills World Research, 68% of all real estate investment in London comes from overseas, compared with 13% in New York.

But after five years of increases that drove housing prices back up 28% in prime Central London, the market did an about-face in late 2014, when Labour Party boss Ed Miliband proposed a “mansion tax” on properties over £2 million. Although he lost the general election in May 2015, the policy heavily hitting rich (and nonvoting) foreigners also appealed to Prime Minister David Cameron’s government. He co-opted Labour’s policy by “reforming” the transaction tax on all home sales, with the progressive tax rate going up to 12% from the former high of 7%, and now levied on house values above £1.5 million. (For related story: “The Lowdown on London Real Estate.”)

The United Kingdom government then went after the tax regime that for decades had allowed rich foreign nationals to “ring fence” from its tax authorities income and assets held outside of Britain. Starting in the 2017 tax year, foreigners who have been living in the country for long periods will be subject to the same income, capital-gains, and inheritance taxes as British citizens. These two changes in tax policy, says Cook, “changed the dynamic” of the expensive properties appealing to wealthy second-home buyers from abroad. But for an American—taxed in the U.S. on worldwide income in any event and unable to fully benefit from the old “nondomiciled resident” tax regime—London’s soft prices this past year still look like an opportunity.

 

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