Mortgage Concepts Associates director Mike Richards said recent changes to the buy-to-let market meant high end London assets were not as lucrative as they used to be because investors were unlikely to achieve the returns they once did in the past.
With many new builds earmarked for investors this meant the inner-London market was coming to a halt, he said.
The government has introduced a number of changes to the way buy-to-let properties are taxed in recent months, in a bid to free-up houses for home buyers.
This included a 3% Stamp Duty hike for second homes and buy-to-let purchases from April and a slashing of the tax relief afforded to investors on buy-to-let mortgage interest payments from April 2017, when rates will change from the marginal rate of tax to a 20% flat rate.
In addition, the Prudential Regulation Authority plans to introduce tougher affordability checks for borrowers based on a stressed base interest rate of 5.5%.
Richards said: “All the buy-to-let changes will affect the new-build market quite considerably. I do think Battersea was earmarked for investors. With the 3% extra tax I don’t think they are going to buy. The prices will have to come down.”
Research out in August indicated the market was facing problems when it found planning approvals had risen sharply the past three years while sales had fallen.
According to property investment firm London Central Portfolio, 106,208 new units had been approved for development in 2015, representing a 20% rise on 2013. New applications were also up by about 27%, mainly in the Tower Hamlets and Battersea Nine Elms areas.
At the same time prices in those areas had fallen, the firm said, with Battersea Nine Elms decreasing by as much as 8% since 2014, even though prices across London as a whole were up 23%.
Richards said prices would have to come down “considerably” to make the properties worthwhile for investors and affordable for people, perhaps by as much as 20% to fall in line with those outside London.
“It’s going to be a medium term issue until prices fall in line with outside London and are cut down to a relatively affordable level,” he said. “There is an abundance of new builds going up and the government allowed office blocks to be converted into flats. Are they going to fill them all? The market in London is still relatively buoyant but prices will have to shift.”
Fellow broker Coreco managing director Matt Lowndes agreed the Stamp Duty changes have affected the market but he said this did not mean demand had diminished.
Asking prices were also not a good indicator of demand levels because they were often very different to selling prices, he added. He hinted some prices might have been set too high to begin with, which could explain some of the recent price drops.
He said: “If something is priced right it will sell. If it’s overpriced there might be an adjustment. There has not been a real softening of the market.”
He added: “We are not building the right types of affordable housing, as developers build what they can make the biggest profit on. But I don’t think we will end up with ghost towns [in London].”