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Knight Frank now expects luxury house prices in central London to fall 1% this year, down from its forecast of a 1% rise in January.
The prediction was made before Rishi Sunak called a general election on July 4th.
Knight Frank said reforms to non-residential regulations have caused some hesitation in the prime market since they were proposed in March.
Tom Bill, head of UK residential research at Knight Frank, said: “Under the old rules, individuals could reside in the UK without being taxed on their worldwide income.”
“Treasury Secretary Jeremy Hunt has set out plans to limit the period to four years, but there have been signs he is open to softening his proposals. Not wanting to be outdone, Labour has come up with its own tougher rules, which are yet to be put into place.”
“The combination of two different proposals and the uncertainty of the general election has understandably caused hesitation in the property market.”
Rent forecasts for prime central London neighbourhoods have been cut to 2% from January’s forecast of 5.5%.
Meanwhile, growth in prime outer London areas fell from 4.5% to 2.5%.
Bill added: “In the short term, it’s more likely that some form of tenant reform legislation will be passed and the balance of power will tip in the tenants’ favour.”
A structural undersupply of rental housing, a competitive job market, high immigration rates and rising mortgage costs are all supporting strong rental growth.
At the same time, supply levels remain tight, although there are signs of some improvement.
“The supply of rental property is unlikely to increase enough over the next few years to have a substantial impact on rental growth,” Oliver Knight, head of residential development research at Knight Frank, said.
“Private landlords in the buy-to-let sector continue to be hit hard by rising interest rates and tax changes, which are resulting in some exiting the sector.
“The supply of rental housing is increasing, but not fast enough to make up for the rental housing lost.”