'Zombie' alert over rhetoric on high-end London property market

London's high-end housing market risks falling into a "zombie" state as political rhetoric against foreign property investors builds in the run-up to the general election, say estate agents.

George Osborne used his Autumn Statement this month to kick off the Conservative party's re-election campaign with a crackdown on wealthy foreign homeowners who will be liable for capital gains tax in future.

Labour and the Liberal Democrats have vowed to introduce more taxes on expensive homes - dubbed a "mansion tax" by some - if either party wins the election, due in 2015.

With the political debate over the divided housing markets set to intensify over the next 18 months, potential buyers of prime London properties risk being scared off, say estate agents, who warn that this could stall the capital's price growth and result in fewer homes being built.

Ed Mead, a director at Douglas & Gordon estate agents, said the market was likely to slip into a "zombie" state.

"Uncertainty is the biggest problem we have at the moment," he said. "The top end of the London market is already bracing for life post-May 2015 and enhanced wealth taxes."

Savills is forecasting a slowdown in high-end property price growth next year and a dip the following year as a direct result of the election campaign.

Lucian Cook, Savills' head of UK residential research, said: "The taxation of high-value homes will undoubtedly come under scrutiny yet again in the run-up to the election. Political rhetoric will generate uncertainty, which we expect to slow growth and could even trigger marginal price falls in 2015."

However, data show that the growth in value of London's most expensive properties had stalled before the chancellor's move against foreign buyers, raising fears that the market was already beginning to stagnate.

The average house price in Kensington and Chelsea, the centre of London's prime property market, dropped 2 per cent in the most recent data available from October, according to figures from LSL-Acadametrics. Until this point, prices had risen nearly 10 per cent in the past year.

Any slowdown could hinder the construction of new housing, property professionals say. Housebuilder Berkeley has warned that the political uncertainty could hold back its investment plans.

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Many housing projects need to sell a certain number of homes before construction starts - known as "off-plan" sales - and these are usually to investors rather than occupiers. Without foreign investors making off-plan purchases, some housing schemes would be unable to make the finances stack up, said Adam Challis, head of residential research at property services firm Jones Lang LaSalle.

"In the post-credit crunch world, to trigger development finance a certain proportion of sales - usually circa 30 per cent - must take place first," he said. "[For example] a one-third drop in overseas investment implies that thousands of homes would not get built in London next year."

The supply of homes in central London is already very constrained. Just 200 homes were built by private developers in the most expensive boroughs - the City, Westminster and Kensington and Chelsea - in the year to March, figures from Department for Communities show. And only 6,360 homes were built in all inner London boroughs - an area with a population of 3m people.

Agents believe the uncertainty could particularly deter wealthy overseas buyers. London has the largest proportion of foreign buyers of the world's biggest cities, according to figures from agent Knight Frank, and half of all high-end homes were sold to overseas buyers in 2013.

Any change in the taxation regime leads to a short-term slowdown in sales as buyers adjust to the rules, Camilla Dell, managing partner of estate agency Black Brick, said. "What worries any buyer is constant uncertainty and change."

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