We said a fortnight ago that a period of political instability may curb activity in the UK property market.

Last week’s by-election result, where Labour came third behind Reform and the Green Party, makes the Prime Minister’s downfall look almost inevitable. 

The result was “seismic” according to Helen Thomas, chief executive of political and economic consultancy Blonde Money.

“It was the worst outcome for Keir Starmer,” she said.

“A reshuffle will be one way to formally shift the party to the left and buy a little more time.

“But the psychological blow for Labour MPs seeing the loss of a heartland safe seat to a more progressive party will be too hard for some to take.

“We now know for sure that political instability is rising.”

Financial markets initially shrugged off the result, but appeasing Green Party voters and the bond market won’t be an easy task for the government, whoever is in Number 10.

Political Drama

Activity in the property market is likely to soften as the Westminster drama escalates further.

A leadership contest will cause hesitation while it lasts, but the prospect of further wealth taxes will have a longer-lasting impact in high-value markets like prime central London (PCL).

A new government could also push mortgage rates higher if financial markets don’t approve of its tax and spend plans.

Prime markets are already feeling squeezed.

The number of exchanges in PCL and prime outer London (POL) was 11% lower in the year to January compared to the previous 12 months.

The decline was largely due to the prolonged period of speculation around property taxation ahead of November’s Budget.

The mood has improved since and new high-value council tax bands were lower than feared.

However, supply has recovered faster than demand, which is keeping downwards pressure on prices.

The number of sales instructions in January in London was 16% higher than the five-year average, Knight Frank data shows.

Meanwhile, the number of new buyers registering was 4% lower.

Prices Under Pressure

Average prices in prime central London fell 4.9% in the year to February, which compares to -5% in January.

Meanwhile, in prime outer London, a decline of 0.5% in February was the widest recorded in 21 months. 

Demand in needs-driven markets is more robust, which explains by the gap between price growth in prime central and outer London.

It reached its widest point in nine years last month.

Average prices in PCL are 22% below their last peak in August 2015 and the relative value argument is supporting demand. Falling mortgage rates will help.

However, the combination of political uncertainty and the burden of stamp duty in a market where prices are falling is keeping positive sentiment in check.

Another piece of good news is that nobody has been talking about today’s Spring Statement.

There has been no speculation about which taxes may rise, and the Chancellor appears keen to make it a non-event.

While we don’t have to worry about what the Chancellor will do this week, we do have to worry about who will be making the decisions later this year.