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Impending Shock to the London Residential Market

Peter Hemple reports on if BTL returns could head towards zero

The Deutsche Bank (DB) real estate team has just released a 76-page report on the London real estate market and believes that material changes in BTL economics will create a potential shock to London's residential property market.

New tax rules will reduce BTL returns on equity (ROE) towards zero and result in low or negative cashflow, particularly for new landlords. Meanwhile, new mortgage regulation could severely restrict the ability of investors to use leverage to buy more properties.

DB reports: 'We expect these changes to result in a substantial fall in BTL purchases and some selling. This has the potential to be a major drag on a market where less than 4% of stock is turned over each year.'

While DB sees the overall London demographics as favourable, it chose to focus the report on London due to its already stretched affordability levels.

The report states: 'London residential property price growth of 190% over the past 15 years has been equally driven by three factors: income, lower interest rates and growth in deposit/equity. In our view, a key support behind this strong growth has been the rise of residential property as an investment since the end of rent controls and the availability of buy-to-let mortgages. The proportion of London stock that is buy-to-let has increased materially over the past 15 years and we estimate today stands at 37% of London stock (excluding social housing). Data implies that mortgaged BTL purchases represent as much as one third of London transactions.'

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