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Welcome to in the City.

Each week we unpack a story that's crucial to the world's financial capitals.

I'm Allegra Stratton.

So the UK housing market has been under pressure for some time, but now the data is catching up.

In June, house prices recorded their sharpest drop in more than two years.

That's according to Nationwide Building Society.

The fall came as a surprise.

Economists had actually expected a small uptick.

This latest decline follows the government's move in April to raise transaction taxes.

It's a change that's made life even harder for buyers already dealing with high borrowing costs.

And if you zoom in on the luxury end of the market, the picture gets even bleaker.

London's prime property, once a safe haven for global capital, is in a drawn outslide.

Prices are now more than twenty percent below their peak, with no real signs of a rebound.

Welcome to the City of London, The.

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So in this episode, we want to dig into what's driving this UK housing slow down and what it might tell us about where we're all heading next.

To do this, I'm joined by Marcus Ashworth, who's a Bloomberg opinion columnist, and Damian Shepherd, who's Bloomberg's European real estate reporter.

It's brilliant to have you both, hear Marcus, Let's just start with you.

There's nationwide numbers.

As we said in the intro, they expected it to be a one percent increase.

It ended up being a point eight percent decline.

Is it significant?

We're all doom.

It is significant.

And firstly, I don't believe that economists should try and estimate monthly housing numbers because it's this point listly pointless and it shows you by this myss that that really all you should be doing is maybe a quarterly but really on an annual basis where you guess it might be because the nature Onde only looks at its own selection of mortgages, and it's probably the most accurate in the context of a very inaccurate field of competitors.

And I just think that the rush toulfill completions before the April deadline and the stamp duty rose.

It was only such a minor rise, it's had such an outsize effect where really it's been the most pointly bad economic decision I think from the Chancellor, and it's created a vacuum and we're seeing the results of that now whereby you just literally the whole markets has opened up and we have nothing to show for it because volumes and this is the whole point you need.

You need an active housing market, doesn't matter of price, going down a price and going up, you need to be able to transact.

And because stamp duge is so high at the top end, no one's downsizing because it's ruinous for people though that she's got Hang on second, I'm solding a four bedroom house and picking up a two bitche and flat and I get nothing out of it, so they don't.

At the same time, I think to increase charges on first time buyers and at the lower end is just completely construe to what this government allegedly is supposed to be about.

Blah blah blah.

This is the price where I'm worry most about.

It's not so much where house prices will go, because they'll probably end up higher because they're not building any so by definition demand supply, but the lack of volume is seriously worrying.

Was it going to not the whole economy because it hits everyone.

So the couple of things you said there just to pick up on before we bring Damien and so just expand on your point about it's the lack of any transactions.

It's not really that our price is going up.

Are they going down?

We completely take your point that they'll probably end up going up in the end, but just explain for the listeners why it's the sort of total clogging up.

Well, we just have had I think it's the worst number for something like twenty years.

It is money more than twenty years.

As far as monthly volumes for April, we've yet to see May, but they're not likely to be much better.

It shows you your economy it's ground to a halt, which means that your solicitors, your builders, your plumbers, all the various ansillary trades, furniture supplies, you name it.

The whole lot is going to have a knock on effect later in the year because the world isn't churning it.

And that is something which is you know, because the costs of transaction are too high.

They are ruinously high.

If you are a foreigner and buying a second home in this country, it's nineteen one to nine percent on top as a stand duty charge.

I mean it's just forget about it.

But we don't want your tax.

Yeah, it literally is, and that I let alone the non domb stuff.

So it's the reason why I'm sure Dame will come onto it.

High end London has collapsed fifteen percent from Kensing and Chelsea in a year because in price terms that volumes are non existent is because everyone is trying to sell and then not are the latest marginal seller and that is what's affecting everything.

Neat segwe damien very neat.

Indeed, I'm still kind of chuckling at your opener their markets of we're all doomed, but if you speak to the London brokers, they genuinely feel like they're doomed.

Right now.

The top end of the market is in an absolute state.

I mean you mentioned they're let alone non doms.

I mean that is without question the biggest thing impacting the five million pounds plus market.

There's been debate around the numbers of how many non doms are genuinely leaving.

Chat to the people selling those houses.

They will tell you this is very real, this is happening, and the knock on effect on that side of the market is a complete lack of demand because the people trying to ship off their homes are trying to sell to people who will come under the exact same issues as those trying to leave the UK.

It's leading to less transactions and massive dip in prices.

Price reductions are basically essential right now if you want to get anywhere near selling your house.

There's one really really interesting case in Mayfair.

Beautiful penthouse went on the market for one hundred million pounds in twenty twenty three, about six months ago, is knocked down to eighty five million pounds.

A few weeks ago it's down to sixty eight million pounds.

There's massive discounts going on.

It is as close as you can get to a blood bath at the top at the moment.

Yeah, it's not just the top unfortunately.

So just let's stay at the top.

Because the other point that Marcus made that you would think they'd listen to more in the treasury, because obviously we have to assume that they're not.

They're getting numbers that are telling them they should be worried, but because of the politics of the Labor Party, this is sort of their comfort zone.

I think all of us, all of us in this room and people listening, will beg to differ.

But I think what we'll worry them is this point around ancillary services, so the entertainment, the restaurants, around all of these houses are where you have so many people in employment.

Exactly, and I mean it's completely across the board.

I mean you've got to look at the geopolitical tensions as well as another risk factor for the top of the market.

You know, there is hope building the interest rates will come down to a point that they need to.

But the more these tensions rise, the more central banks might be cautious with their action as we move through twenty twenty five.

So there is just this sea of issues impacting the top of the market, and as Marcus says, you know, lower down.

To normal bit of the market and just before we sort of move on to you know, what can be done and will anything be done?

And indeed will they try to do more?

Because I think that would be the sort of race, the kind of bet at the moment, given the budget problems.

They are making worse themselves every day.

But just looking at your patch, Damien, who will buy a five million you know, if you've got us a s uplus a five million pound plus houses?

And the other thing I understand is the problem is that a lot of these non doms they aren't under pressure to sell.

They're wealthy, so they put them on the market.

Sometimes it inflated rate values, but they don't care and they're just waiting to see, you know, does it however long it takes.

They don't need the money, whereas normal families need the money, so they have a different pressure and strategic outlook when selling a house.

It's yeah, I mean, braks have said to me, it's the year of the day, mestic buyer.

If you've got a rich brit who can afford a property five million pounds plus, they're the ones you're looking to target at the moment if you're looking to sell one of these homes.

Those coming in from overseas are looking at renting.

They are brokers who are setting up rental divisions now in response to the huge demand for rental properties because these people coming into the UK they just don't want to mess around with the tax environment, it's too uncertain and it's just not worth their time right now.

So we saw last night a huge climb down by the Prime Minister and put the politics of it to one side.

There's a fiscal implication to not going ahead with your five billion pound welfare reforms, and obviously that's on top of the U turn on winter fuel payments, so they're going to be looking to raise taxes in the autumn markers they are.

And I think that's what's quite amusing to see Governor Bailey of the Bank of England essentially sort of show that a bit of legg saying that he's going to have to cut interest rates probably a bit more aggressively, and certainly I think one's nailed on for August.

But also the fact they may stop obliterating the long end of the guilt market by selling active guilds, but then the girl market yield rows.

Why because everyone knows, hang on a second, a five billion a hole from welfare is actually going to extrapolates probably fifteen to maybe twenty billion of extra taxes in October and that makes life very difficult.

So it's throw back onto Bailey.

Does that make him want to hold off and do nothing or does it mean he's going to have to cut interest rates more?

And I think it's the latter, and I think they're going to have to cut rates more, which we're already seeing two and five year swaps, which is as a hedging tool that most mortgage providers at least reference depending on the pots of cash they got.

But they some of this stuff that will head straight away and therefore they lock in a rate and that's what were their offers for as long as demand lasts, and that is getting slightly better.

It's the one good thing we have got going on the UK mortgage market.

One that the banks aren't for closing.

Two that they are being flexible on lots of different types of extended maturities and various other different types of structuring, on interest only and things like that.

But at the same time they're more aggressive on their their mortgage off than the actual underlying guvernment bond yields are, so in that sense we should be quite thankful at that.

Probably mortgages are going to get better, which may add some support on the broader market.

I think the North of England, Wales and other parts of perhaps lower price regions are sill set to do fine.

It is the wealthiest part of Europe, London and Southeast Corridor, all that area there, which is in a different world now.

Normally it leads the market, but it is, as Damian's very clearly explained, it's in a vacuum now whereby we will struggle and it doesn't really matter where interest rates are quite so much.

But when you talk about those fifteen to twenty billion of tax rises that we're now assuming she has to go for, and obviously she had her the chancellor eliminated and you know, the basic rate and income tax generally because of the pledges made during the campaign, which she may or may not roll back on.

But that's very tricky politics for her too.

You know what she left with, and you know, you once put a time as a labor chancellor might think, well, i'll go for more property taxes.

I think she goes on pensions.

I think she goes on potential hope.

She said she's gonna avoid capital gains tax, which again very much ties into the property aspect.

I think pensions are are the prime target, and she'll just expand the bands of income tax.

The physisical track.

Whether that gets her to the number she needs.

I'm not sure there are some ringking links you can do and boy about banking and contitative tiny, but there are some ways the OBAR could be helpful.

However, the Office of Budget Responsibility, her biggest friend, the one she's slashed herself too, have just come out and much of the immortal words, they've been too optimistic on their economic outlook.

If they revise down the economic outlook, the numbers we're talking at cas of a maybe thirty plus billion, and then the wheels are off and maybe then actually the OBI will do themselves out of business, but she'll have to cancel paying any attention to them, Damien.

There were reports that've gone quiet now, but there were reports that she might one of the U turns might end up being on the non dom.

Is that something that sort of ripples through the sector too late, Marcus says, But was it something that was noticed by the people you speak to, and was it something they believe they need?

Yeah, I mean I immediately ran one of the brokers who actually put to my attention that huge price drop in Mayfair after the news of the non dom U turn came out.

She said it could stop the bleeding, but it's not going to change things overnight.

I think you look at all the other sea of issues at the top of the market, this is sort of the focal point.

So if there was a U turn, particularly on the forty percent inheritance tax on the overseas assets, I mean, that is just something that these non doms they cannot swallow that.

If the inheritance tax side of things is looked at, then that is absolutely the part of the non doms debate which resonates the most when it comes to demand for the top end of the housing market.

So I think it would be extremely interesting if that was looked at, And I think that is almost just that kind of life saver for brokers and sellers at the moment that they're kind of looking at as will this be the point that could just about get our home on the market and sold.

Do you think inside the treasury they will be worried about the dynamics we're discussing here.

Think when they've brought them through they would have foreseen some of this.

Is some of this desirable from a policy perspective.

I'm trying to be see it from their perspective.

I think they have to be that all of this talk about a wealth exodus is extremely concerning for the UK.

And you know, like I said at the start of the conversation, there's been this debate around you know how deep this exodus has been.

But when I'm speaking to the people selling these homes, it is really really serious.

And I think the fact that we're seeing reports of a potential U turn might hint to the fact that they are genuinely sitting down and speaking about this.

And you know, I think the action that will be taken will be telling.

Imagine also being a Treasury civil servant where you've put forward suggestions for it was Rachel Reeves's last budget, you expect that they will be enacted.

Is you expect that your budget is balanced because it will go through And you're now seeing a number of U turns that extremely expensive, So you'll be thinking, well, what tax rises do I suggest for the next autumn?

Because the ones I suggested for the last autumn got junct as soon as it got hot.

So I think we will become a not a crisis, but a real sort of breakdown in trust between civil servants and the political class.

Even further, because if you're the ideas you're part of the thought through policies you're proposing, you cannot be confident will last the parliament exactly.

And all of this talk about the political uncertainty.

I mean that is the one word that the real estate industry doesn't like, uncertainty.

I've already had conversations with people speaking about the next election and the rise of reform and this huge uncertainty about who is going to be in power in four or five years time.

I mean, all of these things are just combining to create uncertainty, which means less transactions and a dip in.

Pricesmia River, Well, first things first, on the property building side, they're not going to get to half.

I don't even thin they're going to get to half.

And I think they know that now because the way the planning system is and the current run rate on building this year is is at eight year low, so it's going downhill and planning permissions and the various other things you're coming through the pipeline.

So I would think they will be petrified.

I hope they'll be petrified.

I mean literally crimea River for them, But you know they are.

Because of the hubris they've come through.

Putting through a whole bunch of stuff which has been batted away for fourteen years of Tory government for good reason, and she's managed to fall for should be say, the treasury tricks.

And now we're seeing it's not just on what we're talking about so far, but private school fees.

You know, as you mentioned, everything they've touched and changed, it is blown up in their faces.

So yeah, I imagine they should be petrified.

I hope they are, because really the whole point of the model of following the obr's fiscal rules is ruinous.

They cannot go after employers because they've clearly hit the labor market.

We can't measure the labor market, but everything ant dead is showing us.

So the O and S is dysfunctional.

The OBI, therefore, by the definition the numbers is getting through.

It's dysfunctional.

I think the Bank of England is equally So you'll have a situation all the sort of organs of state are failing and the leadership at the top is trying to enact a plan which has fallen apart at first contact with the enemy, and that makes it very worrying.

What they have done is they have moved to the economy.

The spread the fiscal spurs they've done on the public sector expense to the private sector.

The public section is what they said they wouldn't do well, they said we will be That's exactly what they've got to have it done business and the public sector, friend, is taking years and well may not even calm by the time in the end of this parliament, certainly on house building for instance.

But the private sector is getting hit immediately and they're the ones you pay for it.

And that's the trouble you're seeing.

You know, GDP may held up at one percent or something pathetic, but the reality is the private sector shrinking and that is what's going to stop unfortunately.

Are I suppose the sort of the counter to a lot of your very robust, excellent points is that a lot of this direction of travel of a larger state and greater expenditure on public and private was something that the Conservative government began, and that we have an electorate all of us included in this in this podcast, that wants more and more and more, and so in the absence of somebody saying we have to do less as the state, and you've actually seen an increase in the last six months with the need to increase defense spending.

So you're seeing greater demands.

Buying American jets you mean, yeah.

Yeah, or making our own submarines, as the Prime Minister valiantly says with the Director of Travel, was begun before Rechel Reeves and kissed Arma.

They have, however, added to that expenditure.

And I think I suppose the question is given lots of Western governments are increasing taxes and are increasing expenditure.

What are the rights?

What would be the taxes?

It sounds like pensions.

Is you think some.

Mentions are the one thing they missed out on, one of the few things they missed out on October everyone expected myself, I actually just dust down the ones our age in October saying this is what they're going to kill and rerun them, because you know that the ones that they they stopped doing what clearly had done some road testing on they will have to do again.

I think this time for real, it's uptimes they're rais enough.

Well, I mean again, it depends how big the gap is.

Depends.

There's a few other things they can pull out of the far.

They've already rigged the numbers by changing to a thing called the sniffle.

But basically they can move the goldpost again, and I'm sure they will have to.

So there's lots of things that can be done, and none of them very pleasant.

But I mean, I would say fiscal drag is and obvious cutting the pension allounces.

Did you see the story the other day on Boomberg that the number of higher rate taxpayers has doubled because of fiscal drag.

Well, no doubt continue that's the one good thing for housing because we're paying all the civil servants more and the various different parts of the sort of quango world where unfortunately having to tax the rest of the employers through national insurance contributions more.

The net net that the people who can afford to buy it, take a mortgage out, are relatively getting paid better the civil service, so hopefully they will buy more houses.

Damian, What is the thing that the people you speak to would like?

What makes this better?

Or is it gone too far?

That's you turn on nondums, That's what they'll say.

The inheritance tax that people have to pay on their overseas assets is absolutely too much for them to swallow.

To allow the top end of the housing market to function in a healthy manner.

I think a decline in rates would be helpful, But the top end of the market is driven pretty much on sentiment on the headlines that these top end buyers and sellers see.

So I think that absolutely it's it's just hard to wait to get away from the non doms conversation.

And I think the fact that it's hard to get away from it shows why Reeves is clearly making some considerations right now.

We have to cut stamp duty.

That's duty is a huge for everyone, that the no non thing is vital.

But at same time that though, can they well, it's fifteen billion for them, But the point is if that fifteen billion on a high volume market goes to ten billion on a low volume market, that will lose both ways.

So because the knock on effect of what you've done to your housing market in the whole reall economy.

So at some point they might have to bite the bullet on that to realize in a sort of multiplier effect monstrous way of going about it that kness and doesn't work necessarily in this particular instance, and cutting taxes is actually the best way of growing the economy.

Obviously, a year ago we're coming up for the one year anniversary of the kiss Arma's government on Saturday, and they came in and there was there was fanfare around doing things differently.

And to your point earlier, Damien, ending the uncertainty and so on, is it is it your the view of the people you speak to that that has not happened.

I think so it's just the way that the housing market is playing out right now.

Is it's pretty negative.

I mean sort of lower down in the kind of five hundred thousand to one million ballpark.

You know, things are playing out in a more functional manner.

But I think while everything is this uncertain, this unhealthy in terms of low transactions, huge price reductions, people aren't happy, brokers aren't getting business.

There's a lot of pressure on the government to just do something to start to stimulate deals.

Again.

Thanks for listening to this episode of In the City from Bloomberg.

It was hosted by me Alecra Stratton, produced by Sersardi Moses and dam and Tala Armadi.

Brendan Francis Newnham is our executive producer and special thanks to Marcus Ashworth and Damien Shepherd.

Please subscribe, rate, and review wherever you listen to podcasts,