UK Property Market: Is the Stamp Duty Holiday Effectively Over?
Are House Buyers really benefiting from the Stamp Duty Holiday? Investment management consultant Matthew Feargrieve looks at how rising UK house prices are negating tax savings.
The economic crisis of 2020 caused by the COVID-19 pandemic reinforced the existence of two phenomena. First, the massive disconnect between the stock markets and economic reality. As economic growth dwindled, recession kicked in and unemployment rose, the S&P500 and other world indices rallied. Secondly, as the UK established itself as the World Number 2 for coronavirus mortality, and Brexit worries played out, the UK property market took off.
Now, the UK housing market has for the most part been a law unto itself. But the announcement by the UK government of the stamp duty holiday, at the height of the First Wave in the summer, combined with a paradigm shift from the office to the home for many affluent professionals, sparked a buying spree across the UK.
The stamp duty relief was originally scheduled to end on 31 March. In Chancellor Rishi Sunak's long-awaited Budget statement on 3 March, the holiday has been extended until 30 June. This means that no stamp duty will be payable below the first £500,000 of a property's purchase price until the end of June, with a maximum tax saving for purchasers of £15,000. A saving that has now been wiped out by the hike in property prices: keep reading to understand why the so-called "savings" will not benefit you at all.
In addition, there will now be no stamp duty charged on the first £250,000 of a property's purchase price until the end of September, a "saving" of up to £5,000 compared to normal tax rates: keep reading to understand why you won't benefit from this, either.
So what will be the trajectory of UK house prices be for the rest of 2021? Should you jump in feet-first and buy now? Or resist the urge to join the herd, and see what happens to house prices later in the year?
UK Property Market 2020: Roundup
Average asking prices across the nation have risen £19,920 to £319,945 over the past 12 months. The momentum provided by the stamp duty holiday - which enables savings of up to £15,000 on purchase prices up to £500,000 - has led to average asking prices finishing 6.6% up on 2019.
Average asking prices across the nation have risen £19,920 to £319,945 over the past twelve months.
Prices have undergone their strongest five-monthly gain since 2004, with the average property price rising more than £15,000, according to the latest Halifax House Price Index.
Demand is now exceeding supply, with the number of properties being marketed for the year to December 2020 down by 0.6% on the same period in 2019, and the number of sales agreed up by a whopping 10%.
UK House Prices: the Outlook for 2021
It should come as no surprise that the commentary being mouthed by UK estate agents is couched in reassuring terms about the resilience of UK house prices in 2021. After all, why wouldn't it be? Estate agents live on the commissions they receive from properties which - let's face it - would sell themselves, without the agency of an odious intermeddling middleman.
So don't expect any let-up in estate agent hype over the festive period. You will read, and be told, that demand remains very high, and that there is "plenty of fuel left in the tank" for the housing market. Interest rates remain at near-record lows, and greater availability of low-deposit mortgages at competitive rates are expected in 2021.
Estate agents and online property websites will also - naturally - tell you that the number of available properties for sale is at a record low, and that there is therefore scope for further modest price increases in 2021.
We know that the stamp duty holiday will end on 30 June. So whose view can we trust, and what will happen to house prices afterwards?
The consensus view of estate agents is, unsurprisingly, that a "tidal wave" (as some agents put it) of buying momentum will keep the market buoyant until the stamp duty cut-off of 30 June, after which there will be a drop in demand that, far from leading to a drop in UK house prices, will more likely bring about a return to pre-pandemic normality which, in turn, will lay firm foundations for strong and consistent growth throughout 2021.
The eternally rosy picture painted by our nation's cherished estate agents will be familiar to anyone who has had dealings with them. But what is the objective, more truthful prediction of where the UK housing market will head this year?
Let's examine some of their assertions, and subject them to a basic fact-check.
The stamp duty holiday saves me money. Er, not any longer. Halifax points out that the current stamp duty saving of £2,500 on a property costing £250,000 is now far outweighed by the average increase in property prices since July. The index also shows how properties sold to home-movers recorded a much higher rate of annual house price inflation (7.9%) than first-time buyers (5.8%), even though the latter were the intended beneficiaries of the stamp duty holiday.
Buyers probably consider the stamp duty holiday when deciding to move, but it is unlikely to save them any more money than if they had moved this time last year.
Interest rates will remain low in 2021. This looks like a dead cert. The Bank of England is sustaining very low interest rates as a means of fiscal stimulus, and even negative interest rates are being talked about. This environment certainly favours borrowers like mortgage buyers. But the economic theory behind keeping interest rates low points to the deeper problems that we will all have to face in the UK in 2021 and beyond: the extreme likelihood of shrunken economic growth (thanks to the lockdowns of 2020), inflation and rising numbers of jobless people nationwide.
Low- or zero- rates of interest certainly give leveraged buyers more short-term buying power. But, their lending banks will be all too aware of the broader implications of these rock-bottom rates, even if their customers are not.
Rates this low, combined with the economic price for repeated lockdown and extensive furlough that the UK will surely have to pay in 2021, and for many years thereafter, are cause for deep concern. Lenders should be wary when taking an offer of lending today, when the chances of it being pulled tomorrow are higher than ever before.
Mortgage products are generous and plentiful. Not true, for the reasons we just mentioned. Anyone who has been house-hunting recently will have heard stories, and more than once, from homeowners whose property is "unexpectedly back on the market" (as the estate agent's blurb goes) because the would-be buyer's lender withdrew the mortgage offer at the last minute.
This trend has been particularly prevalent following Chancellor Rishi Sunak's Spending Review in November.
House hunters who need leverage to fund their purchases are fools if they tell themselves that there is no risk of their lender pulling the mortgage product before they complete or - worse - after they have moved in.
We began this blog by pointing to the unhealthy disconnect between the economic fundamentals at play (recap, if you need one: shrunken economic growth, unprecedented government borrowing, Brexit upheaval to trade and rising unemployment and continuing fears over mutant strains of COVID-19) and the rising UK property market. Beware estate agent hype, and similar assurances of normality on property websites (we all know which ones) which try to convince you that everything is going to be fine in 2021 and (by implication) beyond.
Savings are at record high levels. Because no one could spend much during lockdown. This may to some extent be true. But beware the false corollary that estate agents extrapolate from this, that the "savings" of an estimated £100bn are available to spend on property in 2021.
Like hell they are. Those so-called savings will be absorbed by survival strategies of households who are trying to deal with the effects of rising food costs (Brexit) and loss of income (unemployment or reduced hours). And anything left over will be taken by the taxman, to pay for the overly-generous furlough and sundry other massive expenses undertaken by new boy Rishi.
Things are going to be "Just Fine".... aren't they? This in essence is what every estate agency in the country will tell you. Everything is going to be perfectly normal. Everything is tickety-boo. This is not peculiar to the year of plague that was 2020. It was the same during (and after, natch) the financial crisis of 2008, which was nothing compared to the global economic damage that COVID-19 is wreaking on us.
Think of the massive blow that the lockdowns have dealt the UK economy. Think of the massive tax take that is required to pay back the furlough schemes and all the other emergency expenditure: hikes in Capital Gains Tax, Corporation Tax, a raid on pension tax relief and lowering the State Pension, not to mention the raft of stealth, under-the-radar taxes that the government is able to deploy.
So what should you do?
Let's take a more grown-up look at the fundamental economics in play.
The UK’s economy has been walloped by the pandemic. It will take many years to recover. A slowdown in housing market activity should be expected soon.
And, as ever, we must look to London as the pace-setter of the UK property market. Ignore stories about London emptying. It isn't, for three reasons: first, any half-sensible person should know not to sell their valuable London pad to buy a place in the Styx. It's a big change, schooling is rubbish in the country and the breadwinners of the household would be foolish to assume that they can work from home forever.
Secondly, many people living in London (the affluent kind, the type the property market is interested in) may well have bought second homes in the country, but their primary residence remains in London, where their jobs and friends are, where Heathrow is, and where their best shot at socialising and eating out is to be found when the lockdowns end.
Thirdly, and perhaps most importantly, ultra-rich foreign buyers are really only interested in buying in London, even if they seldom visit their properties there. And this investment is a major driver of the capital's property market and, therefore, the UK's. And overseas byers have been making merry with the discounted asking prices that 2020 had to offer.
Your 2021 Property Action Plan. Resist the temptation and the false encouragement from estate agents and property websites to rush into a home purchase before 30 June. And resist these same things thereafter. Consider carefully the fundamental economic situation that each month of 2021 brings. Any supposed "stamp duty saving" will be wiped out by the overall price rises and bidding wars that you will find yourself in. And prices hikes, we believe, must be curtailed by the overarching economic fundamentals of 2021 and beyond.
Better to keep your money in the bank, proof your financial position against what the medium-term has in store for us all (essentially, lower economic growth and poorer employment prospects) and wait for lower property prices in 2021/22 before buying.
MATTHEW FEARGRIEVE is an investment management consultant. You can read his personal finance blog here and see his Twitter feed here.