Deutsche Bank has warned that the “illiquid” UK housing market is vulnerable to an “impending shock”.
A report by the markets research department of the bank argues that “material changes to buy-to-let economics” could lead to a fall in prices, especially in London prime residential market.
Analysts Oliver Reiff and Markus Scheufler say in the report that a combination of new tax rules that reduce buy-to-let returns and new mortgage regulation that could restrict the use of leverage will “result in substantial fall” in buy-to-let purchases – and in some cases substantial sales.
They warn of the “risk of a shock to pricing due to a significant decline in [buy-to-let] demand”.
Without going as far to predict what will happen to capital values, the report says a “return to the affordability levels of 2012-13 would imply a 20% fall in pricing”.
Deutsche Bank said that approximately 40% of market turnover in recent years was attributable to buy-to-let investors, which has massive implications should buy-to-let investors exit the market in significant numbers.
The analysts expect buy-to-let demand to fall by about 50%.
The bank placed a ‘sell’ recommendation on Capital & Counties (Capco), a listed company that owns various London housing development projects.
“We play our expectation of falling mid-prime London residential prices through Capco and its Earls Court residential development land,” it said.
“We expect the valuation of Earls Court to fall by 65% driven by a 20% decline in average pricing per square foot.”