Savills found that speculation over possible property tax changes has made buyers and sellers at the top end of the housing market more cautious, leading to lower prices and a drop in market sentiment.
In a survey of almost 1,000 prospective prime buyers and sellers, 37% said they were less committed to buying in the next six months because of tax speculation, the lowest level in five years.
Only 10% said they were more committed to moving in that time.
Lucian Cook, head of residential research at Savills, said: “Speculation that the Chancellor could announce changes to property tax in the Autumn Budget has further slowed down an already price sensitive prime housing market, making it increasingly reliant on needs-based buyers.
“Buyers and sellers have been left trying to make sense of what different measures might mean for them without any guarantee of what is going to prevail.
“While there will inevitably be winners and losers, the simple fact that they have been mooted so well in advance of the Budget has curtailed the Autumn market.”
“This alone is likely to mean a dip in tax revenues in the run up to the budget.”
The survey found that second home buyers and investors were most likely to put plans on hold, with many worried about a possible extension of capital gains tax on high-value homes.
Cook added: “Normally, we would expect the prime housing market to lead a recovery, but the opposite is true in the current environment.
“Ultimately, any tax changes are likely to take a while for the market to absorb before it enters a delayed recovery phase.”
Prime Central London saw values fall 1.8% over the third quarter, the largest quarterly drop since December 2016.
Prices in this market are now 24% below the 2014 peak.
Leafy, family-oriented areas like Barnes, Fulham, Wandsworth and Wimbledon held up better, with house values proving more resilient than flats thanks to strong domestic demand, especially in South West London.
Frances McDonald, director of research at Savills, said: “Across the board, house values are holding up better than flats, supported by domestic demand, most notably in South West London, which is most synonymous with needs-based buyers.
“Meanwhile, the most discretionary, top end of the market (£10 million-plus), is experiencing the greatest downward pressure on prices.
“The pool of buyers who are typically interested in this price point had already shrunk after the end of the non-dom regime, and some who remain are hesitant to act ahead of the Budget announcement.”
McDonald added: “Nevertheless, there remains an undercurrent of demand from those eager to capitalise on the historic value currently available.”
In the regions, values fell by an average of 1.3% in the third quarter and 3.6% over the year.
The Midlands, North and Scotland were broadly flat.
City markets outperformed more rural areas, with urban values down 0.8% compared to a 1.6% fall in the surrounding areas.
Cheltenham, Edinburgh City, Glasgow City and York were among the strongest performers.
McDonald added: “Over the past year, country and coastal markets have been challenged with ongoing concerns around council tax reform, and now face fresh speculation around additional taxation, placing downward pressure on pricing.
“This is being felt most keenly in the prime country house market, where values are down -8.1% on the year.
“The market, particularly above £3 million, is adjusting to a smaller pool of active and committed buyers.”
She said: “It is important to note that these falls come off the back of rapid price growth during the post-pandemic housing surge (+25% for coastal markets and +18.4 for the Cotswolds).
“Growth across coastal markets and the Cotswolds, in particular, remain in positive territory when looking at growth over the past five years.”
