Last year’s Budget has a major short term impact on the prime property sector in London. The impact of stamp duty changes for £2 million plus residential properties led to sales falling by between 25% and 35% across London, compared to the same period a year earlier, according to Knight Frank.
Although the market has since reacted more positively following the publication of the draft 2013 Finance Bill in December, which provided some additional clarity around the new £2 million plus residential property tax environment, the firm estimates that transactions in the sector will be around 15% lower in the 12 months to the end of March 2013, compared to the same period a year earlier.
Meanwhile, sales of £1 million to £2 million homes are likely to have increased by around 5% over the same period, thus creating a positive impact on this sector, the firm points out.
‘It seems fair to say that the longer term impact of the stamp duty increase, and the new rules covering corporate ownership, will be to reduce total £2 million plus sales by around 5% to 10% below the level they would otherwise be if the new regime had not been introduced. Although of course this is an estimate which is impossible to prove either way,’ said Liam Bailey, head of residential research at Knight Frank.
Many analysts think it is unlikely that Osborne will introduce any new property taxes after stating in December that he had no intention of doing so as this would require a revaluation of hundreds of thousands of homes which would be expensive.
But Bailey points out that the Chancellor didn’t clarify whether his comments were limited to his Autumn Statement, or whether they covered the whole of the remainder of this parliament. ‘Even if the latter is the case we still need to be mindful that the ban on new taxes would cover a new mansion or wealth tax, but would not cover changes and enhancements to existing taxes such as Stamp Duty, Capital Gains Tax, Inheritance Tax or Council Tax. It seems likely that the main announcements affecting the housing market are likely to be investment related,’ he explained.
Bailey also thinks there could be a boost for first time buyers. ‘With greater hope being placed on the housing market as a source of economic growth, we might see the threshold for homes liable to 0% stamp duty rise from the current level of £125,000 for first time buyers. There is speculation this could rise to as much as £200,000 for those climbing onto the first rung of the housing ladder,’ he said.
There are calls for the Chancellor to put more resources into the NewBuy scheme under which builders and the government provide a guarantee to banks that offer 95% mortgages on new build homes, with some talk around extending the scheme beyond new build to existing homes. The government’s maximum guarantee for this scheme is currently set at £1 billion. The Confederation of British Industry would like to see a special housing Individual Savings Account (ISA) introduced which would allow savers to shelter their deposit savings tax free up to the limit of the average deposit needed to buy a UK home which is currently around £32,000 based on 20% deposit.
Similarly there are calls for the Bank of England’s Funding for Lending scheme (FLS), which is aimed at helping banks increase the supply of credit to households and businesses, to be boosted. The initial data from the scheme for the final three months of last year was disappointing, with net lending by banks participating in the FLS falling by £2.4 billion.
The Royal Institution of Chartered Surveyors believes that flagship schemes such as those mentioned above and beginning to work but initiatives such as the Regional Growth Fund and Get Britain Building are yet to bear fruit as insufficient capital is getting through to developers and contractors.
‘The Funding for Lending scheme which is designed to allow buyers to borrow at affordable level is already having an impact on the market. RICS is confident that a further release of funds could assist more would be home owners and small businesses and prevent prolonged market stagnation,’ said Simon Rubinsohn, RICS chief economist.
‘It has been encouraging to see the increase in activity taking place in the housing market since the Funding for Lending scheme was announced. The government should take heart from this and free up more capital to give the market the shot in the arm that it needs by allowing would be homebuyers and small businesses to enter the market,’ he added.
RICS also would like to see clarification as to when Empty Property Rate (EPR) exemption for new build will come into effect. It believes that this is desperately needed on high streets where less development is happening and rents being pushed up.
It also wants to see a commitment to visibly promote public sector construction contracts, meaning that more smaller firms across the UK are aware of projects and able to directly bid for work.
‘The mantra now must be to deliver at all costs. We have seen promises of funding and cheaper borrowing from the government but we now need to see evidence that it’s actually getting through to the firms and projects that need it. Every pound invested in construction provides around two pounds eighty of benefits to the wider economy, and if the UK is to work its way out of the economic slump, ongoing investment in construction will be crucial,’ Rubinsohn pointed out.
Today the latest house price index from Rightmove shows that confidence and momentum is growing in the residential housing market but director and housing analyst Miles Shipside thinks more need to be done to boost the sector.
‘There is an opportunity for the government to continue and build on this housing market momentum with a housing led confidence boosting Budget. Though the government and new build industry NewBuy scheme has been hailed a success by some, further initiatives to encourage building of additional affordable homes, release public land for development, and attract pension fund investment could all boost the construction sector,’ he said.
‘Stamp duty breaks and other initiatives to help increase the number of first time buyers and help first time sellers with limited equity to trade up would also help boost volumes in the wider resale market. Increases in consumer spending and the positive effect on GDP have historically been linked with a positive housing market,’ he explained.
‘More houses need to be built to meet growing household numbers, and the activity it creates is a great boost to the economy. If new initiatives spur the resale market as well as new build sector, then the government could generate a welcome feel good factor that it may judge to be timely with just over two years to the next election,’ he added.
Naomi Heaton, chief executive officer of property firm London Central Portfolio, believes the market would benefit from a change to the stamp duty ceiling which is currently £250,000 and unchanged for over 15 years. She pointed out that over that time the average price of a house has increased three fold from £79,242 to £238,293. ‘There is clear evidence that the step up in stamp duty at £250,000 has suppressed normal price growth. Almost three times as many transactions take place between £200,000 and £250,000 as between £250,000 and £300,000. In 2013, 10% of the market faces the prospect of stamp duty jumping up from 1% to 3%, in other words from £2,500 to £7,500, a massive additional tax bill of £5,000,’ she explained.
Should the band not be reassessed, she predicts there will be an even larger bunching at £250,000. ‘This will impede the fragile recovery of the market and continue to depress house prices which only grew by 2.3% last year. Also home owners will choose not to trade up and that creates another hurdle for first time buyers trying to get onto the housing ladder,’ said Heaton.
‘If Osborne were to move the 1% ceiling to £300,000, average property prices would burst through the artificial ceiling at £250,000. The government would unlock this market and increase sales, boosting the recovery and general morale. If transactions got back to pre-credit crunch levels, which were a staggering 88% higher than now, the 1% stamp duty take on these extra sales would more than pay back the Exchequer for this tax give away,’ she pointed out.
‘Re-evaluating the threshold will not only promote fairness but would be welcomed by up to 30% of the population, likely to have properties between £200,000 and £300,000. With houses representing most people’s primary asset, rising prices will stimulate the feel good factor which the public, retailers and the economy so badly need,’ she added.
Nor does she think that stamp duty should be increased for prime properties. ‘Another hike is likely to result in a dramatic drop in transactions, akin to the 30% collapse seen following the 2012 Stamp Duty increases and recovery would be slower. London Central Portfolio has estimated that the Exchequer would lose £89 million of tax revenue over the year should a similar reduction occur. Not only this, but it will further impact on the heartland of middle England whilst striking fear into those in lower price brackets,’ she explained.
She also believes that there should not be any attempts to make it harder or more expensive for wealthy overseas buyers to invest in London. ‘Foreigners investing in the vital private rented sector in prime central London contribute a staggering £1.2 billion per annum to the economy, supporting a huge array of professions, services and trades across the UK. They further contribute to the £10 billion spent on the retail trade, education, the night time economy and tourism. Any move to prohibit this investment will have serious knock on effects for both the UK’s economy and Exchequer’s tax take,’ said Heaton.
