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Government’s leasehold reform plans could increase property prices

NerdWallet Mortgages House price growth

If the government abolishes leasehold marriage values the cost of short leasehold stock could increase by 9.9%, according to a study from Bayes Business School (formerly Cass) and global property consultancy Knight Frank.

The marriage value refers to the increase in the value of the property following the completion of the lease extension.

In the King’s Speech on 7 November, the government announced it will become the norm to statutorily extend leases to 990 years.

Dr Mark Andrew, senior lecturer in the faculty of finance at Bayes Business School, said: “Our study has found that the Government’s plans to extend lease length and abolish marriage value could lead to a significant rise in the cost of purchasing a leasehold dwelling.

“Since the premium is much reduced by the proposed extension plans, it is logical to expect that a significant number of short leaseholders will extend their lease. Based on the assumption all short leaseholds are extended, the projected cumulative impact on the national leasehold market is a rise in prices by 3.2%.

“Such price rises have implications for the government’s levelling up agenda, as the proposed plans will potentially make housing even more unaffordable.”

“Furthermore, the largest beneficiaries of windfall financial gains will be investors and middle-income occupier lessees rather than lower income occupier lessees.

“Finally, a significant proportion of short leasehold investments are in lower income postcodes. The reforms could have implications for housing supply in the private rented sector if investors respond by selling up to realise the windfall gains.”

Based on the assumption all short leaseholds are extended, the researchers suggest that the longer-term effect is a 3.2% price increase nationally in the leasehold market.

In particular, the largest impacts occur in regions with either a large stock of short leaseholds (West Midlands) or leasehold stock in an expensive house price region (South East), or both (London).

Bayes Business School and Knight Frank also found that the financial gains are not confined to owner-occupier lessees as investors in the private-rented sector are often the largest recipients.

Dr James Culley, partner and data science lead at Knight Frank, said: “The current leasehold enfranchisement process appears complicated and an unnecessary headache for any leaseholder needing to go through it. For those reasons, the government proposals are laudable in their intentions to make the undertaking less complicated and cheaper for the leaseholder.

“Unfortunately, as they stand the proposals also come with large unforeseen consequences regarding affordability and pricing within the leasehold market. For instance, whilst an uplift in value for current leaseholders may be a positive thing, a large number of properties affected are in the private rented sector in low-income areas.”

Jeremy Dharmasena, partner and head of leasehold reform & litigation at Knight Frank, said: “The government’s initiative towards simplifying leasehold reform, particularly in the extension of leases from +90 years to 990 years, comes with positives and negatives. The changes will provide tenants with a sense of stability, ensuring certainty and enhancing the marketability of their properties, which can be seen as a positive step in the right direction.

“However, I’d caution against retroactively capping ground rents, as it will have a significant impact on pension funds and existing contracts, due to a loss of rental income. Abolishing marriage value, as highlighted in James Culley’s paper, will inevitably create further challenges including legal concerns and homeowner affordability. Whilst reducing premiums may seem beneficial, it will lead to a decrease in Stamp Duty Land Tax revenue.”

Investors owning short leasehold stock in the private sector will be the primary recipients of any financial gains, followed by middle- and low-income occupier leaseholders. A significant number of high-income occupier leaseholders will also benefit from the reform, particularly in Prime Central London.