Recent HMRC property market figures show house sales slumped and a significant decline in house sales as the UK government’s Stamp Duty Holiday ends. What does this mean for investors?
UK Stamp Duty Holiday
Stamp Duty Land Tax (SDLT) is a tax payable by property buyers in England for all property over £125,000 (or £300,000 for first-time buyers).
In order to support the UK housing market from the potential damage caused by the COVID-19 pandemic, the government introduced a Stamp Duty holiday in July 2020 and later extended it until June 2021.
The stamp duty holiday meant that buyers of property completing a purchase for less than £500,000 before 1 July 2021 did not have to pay any stamp duty. Importantly, the stamp duty holiday extended to all housing regardless of price meaning that all property buyers benefited from the stamp duty holiday. For a property with a value greater than £500,000 buyers simply did not pay any SDLT on the first £500,000 of the property’s value, saving up to £15,000.
The government introduced the stamp duty holiday to create greater confidence for home buyers and keep the economy moving. The stamp duty holiday was available in two phases:
- 1 July 2020 – 1 July 2021 – SDLT holiday on the first £500,000
- 1 July 2021 – 30 Sep 2021 – SDLT holiday on the on first £250,000
- 1 Oct 2021 – SDLT rates back to normal
House sales slump and the Impact of the Stamp Duty Holiday
The potential savings generated by the stamp duty holiday created a buying frenzy. After the introduction of the stamp duty holiday in July 2020, house sales rose by 15.6% in August and then a further 21.3% in September 2020.
There is no doubt the stamp duty holiday has had a significant impact on the number of transactions, with the number of transactions increasing by a whopping 452,230 in the preceding year, representing a 65% increase in the number of sales transactions.
- Nov 2019 – Oct 2020 – 844,110 completed transactions
- Nov 2020 – Oct 2021 – 1,296,340 completed transactions
What has happened since the end of the Stamp Duty Holiday?
House sales have experienced a massive decline in the first few weeks after the stamp duty holiday. Provisional estimates from the UK government show monthly property transactions fell to just 66,830 in October 21 from 145,980 in September showing a 54.2% decline in sales transactions.
In fact, the property market in England has seen one of its most subdued Octobers for several years.
The October 2021 sales volume (66,830) represents the lowest number of sales transactions in the past decade. Only October 2008 sales volumes (59,710) were lower than those experienced in the past 15 years.
In addition to the end of the Stamp Duty holiday, there is the possibility of an interest rate rise by the end of the year and fuel bills have been rising considerably, both of which are likely to have impacted consumer demand.
However, the labour market conditions remain robust, the number of new mortgage approvals in October was above the 2019 monthly average and the fall in transactions was inevitable given the end of the stamp duty holiday. Indeed more transactions were agreed in the 10 months between Jan 2021 and October 2021 than in all of 2020.
Why is this good news for Investors?
The price you pay for a property is the most important determinant in the overall financial performance of your property investment. The less you pay the greater your capital gain as prices go up and the better your yield because the annual rent represents a greater percentage of the total value of your property.
As an investor buying with the crowd is the worst thing you can possibly do! The reality is that most developers would much rather sell their developments to owner-occupiers because they are willing to pay the most money for the property they buy.
Owner-occupiers have limited negotiating power and pay more for property for several reasons, which are:
- Alternative to renting – many people purchasing new build property will be moving out of rental accommodation, for these people paying a mortgage is a much better alternative than putting ‘dead’ money into rental. They will have relatively limited options to purchase because they need to look for a property that is either complete or close to completion as their lease ends.
- Timing: Owner occupiers buying new build property close to completion of new developments, or once it’s completed. They do not typically have the confidence or the capital to put down a deposit and reserve a property years off plan. They are generally younger and less financially established, and they cannot take a risk that they may not get a mortgage when the property completes. Because owner occupiers buy close to, or at completion, they pay higher prices than if those buying off plan.
- Competition: When owner occupiers are in the market to buy, there is a larger pool or buyers competing for a small amount of stock, when developments are close to being completed.
- Repayment elasticity: Owner occupiers are typically willing to pay for more than an investor because they have great repayment elasticity. Owner occupiers can borrow a greater proportion of the property value and lower rates than investors.
- Greater incentives – Government schemes are designed to help first time buyers get on the property ladder. These government schemes are generally aimed at new build property because this stimulates the economy by creating jobs in construction. This means owner-occupiers will have a financial incentive to buy, and developers have an incentive to sell to them.
It’s for all these reasons that the domestic owner-occupier market is where developers drive their pricing. Because the volume of transactions has fallen so sharply in October 2021, developers may be revisiting their sales strategies.
What does it mean for Investors?
For investors your greatest negotiating power when buying property off-plan is at two times:
- Several Years Off-Plan – this is the time when developers have the smallest pool of potential purchasers and therefore those buying at this point of time have significant negotiating power
- Post completion – once a development is complete, developers literally have unrecognised profit sitting in unsold units and they want to get these properties sold as quickly as possible so they can get they can get their profit
As the number of transactions falls and the heat comes out of the property market, developers will need to look to investors much earlier in their sales campaign because there may not simply be enough owner-occupiers.
You can read HMRC’s headline statistics here.
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