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Stamp Duty surcharge applies the brakes to the housing market

Tuesday 3rd May 2016

Written by Martin Upton

April saw the start of the 3% surcharge to Stamp Duty Land Tax (SDLT) for properties not bought for residence by buyers. 
 
It was no surprise then to see a slowdown in activity in the housing market. This followed the record month in March when 165,400 transactions were completed as landlords rushed to complete deals on buy-to-let properties ahead of the hike in SDLT. 
 
The previous record for transactions in one month was 145,000 in January 2007 – just prior to the start of the global financial crisis.
 
Unsurprisingly, too, April saw a slowdown in house price inflation. According to the Nationwide Building Society average house prices rose by only 0.2% - the lowest monthly increase since November last year -  taking the annual rate of house price inflation down from 5.7% in March to 4.9%.  
 
In fact figures produced by the Land Registry show that house prices outside London and the east fell slightly in February and March, with the national house price inflation data being skewed, not for the first time, by the buoyant market in the south and the east.
 
So, following the surge in transactions in the first four months of this year, summer looks like it will be a relatively quiet time in the UK property market. In addition to the calming effect on the buy-to-let market resulting from the SDLT surcharge, some lenders are tightening up their rules for lending for buy-to-let property purchases. 
 
The Nationwide Building Society is applying tougher affordability criteria with landlords having to demonstrate that their expected rent will be at least 145 per cent of their mortgage costs – an increase from the previously applied threshold of 125 per cent. The maximum loan-to-value has also been reduced from 80 per cent to 75 per cent. Elsewhere Barclays has raised the minimum ratio of rental earnings to mortgage costs to 135 per cent.
 
The rationale for this greater caution lies with the tax changes due to kick in from April 2017 for those using mortgages to fund but-to-let property purchases. 
 
Currently landlords can claim tax relief on mortgage interest payments at up to 45 per cent (the highest marginal rate of income tax). From next April, though, this relief will be limited to 20 per cent – the current basic rate of income tax in the UK. This loss of relief for higher-rate and top-rate taxpaying landlords could severely reduce the profits made on buy-to-let properties – hence the greater caution being applied by lenders. 
 
Two other factors may also take the heat out of property market. First the uncertainty ahead of the EU referendum vote in June may encourage some people to at least delay transactions - particularly where their jobs or businesses are strongly linked to trade with EU member states. The Royal Institute of Chartered Surveyors (RICS) has identified that the uncertainties generated by the referendum have hit the commercial property market. 
 
RICS reports that foreign enquiries about UK commercial property are at their lowest level since records began three years ago and 38% of its members surveyed blamed this on the EU referendum.
 
A second additional factor that may be affecting the property market relates to the uncertainties associated with the roll-out of the Government’s plans to extend the ‘right-to-buy’ to tenants of social housing. The plan is that for each property sold in this way - with discounts for purchasers of up to £103,900 in London and £77,900 elsewhere - the relevant local authority would have to build a new property for renting out to ensure that supply in the rental market does not shrink. 
 
The financial arrangements to ensure this are, though, far from clear and the scheme has attracted criticism from the House of Commons’ Public Accounts Committee (PAC). Scotland and Wales have already decided not to apply this extension of ‘right-to-buy’.
 
The impact of the referendum and the extension of ‘right-to-buy’ on the residential property market are, though, relatively minor when compared with the SDLT surcharge and tighter rules on mortgage lending. Additionally those uncertainties relating to outcome of the referendum will vanish overnight if the vote is to stay in the EU. 
 
The cooling in the housing market will, though, be taken as ‘good news’ by the Bank of England given its concerns about the impact on the stability of economy of a booming property market and, particularly, the impact of buy-to-let purchases on house prices.
 
*Martin Upton is Director of the True Potential Centre for the Public Understanding of Finance (True Potential PUFin)





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