Carrington on Q2: When you are presented with figures such as these over a relatively short period, then something is wrong

Transactions in the London market between £2m and £7m have slumped by 47.62% in the like-for-like period April, May and June, and even the market up to £1m has seen a 36.95% decline in sales; when you are presented with figures such as these over a relatively short period, then something is wrong, says LonRes Chairman William Carrington...

In December 2014, the Chancellor applied reforms to stamp duty. There was a concern that the London property bubble was part of a threat to the wider economy, and measures had to be taken to slow it down. It has become clear now that this tinkering was more political than fiscally prudent, and it was presented as a way to ensure that owners of high value property should pay their fair share rather than a quick way to jump on a bandwagon that allowed the treasury to extract extra revenue. The result so far is that transactions in the London market in the bracket between £2m and £7m have slumped by 47.62% in the like-for-like period April, May and June.

But it is not just London’s higher value market that has been affected, even the market up to £1m has seen a 36.95% decline in sales. When you are presented with figures such as these over a relatively short period, then something is wrong, “...and the soundest way to raise revenues in the long run is to cut the tax rates.” Unfortunately, the “long run” generally tends to be defined as a period of time longer than one term of parliament but another revision to stamp duty may be necessary. The counter is that weakening sterling and depressed prices may attract even more overseas buyers, and possibly shut the door on the home market.

Meanwhile we had a referendum on Britain’s future in Europe and we are leaving – just not yet. We have a new leader, parliament has to ratify the vote, someone has to trigger Article 50, and new trade deals are yet to be negotiated. This is political turmoil and markets appear quite able to cope with that, as evidenced by the FTSE 100 a week later finishing 3% above its level before the vote. It certainly isn’t a benchmark, however.

Economic turmoil is quite another issue, even though Osborne when Chancellor reiterated that we are in good shape despite the UK’s current account deficit being at a near record high. It is, nevertheless, the first item the Financial Policy Committee referred to as it relies on “continuing material inflows of portfolio and foreign direct investment.” In the commercial real estate market they note it had “experienced particularly strong inflows of capital from overseas” and where “valuations in some segments...had become stretched.” They also refer again to the high level of UK household indebtedness, which I presume has risen in the last two quarters as it had fallen relative to income since their Stability Report last December. “The current market for UK financial stability is challenging.”

The best statement I read about the Brexit issue is one where “the future of Europe lies in a ‘variable geometry’ of diplomatic relations that satisfies those who want more integration as well as those who want less.” We seem to be stuck in an all or nothing scenario which doesn’t benefit anybody and yet everybody agrees that the political experiment that was and is the European Union is in urgent need of reform.

The wider picture is one in which people are voting against globalisation and the free trade that comes with it, and who better than Barack Obama to argue “that the global elites have been inattentive to the issues of wages, income and opportunity.” Nowhere was this message felt more keenly than in Sunderland, home of Nissan in the UK and yet where 61% voted to leave. With free trade must come greater security and higher wages – I believe people voted to leave because they felt that uncertainty was better than more of the same.

This article first appeared in the LonRes Summer 2016 Residential Review