Well, the focus of the Chancellor’s speech last week was firmly focussed on property. There were 2 main thrusts to his strategy;
A: to improve supply, B: to attack buy-to-let investors.
It is the buy to let sector we will focus on here.
As we know, and actually wrote about last week, mortgage interest tax relief will be phased out between 2017 and 2020. So a bit of time to plan for that.
However, newly announced is that as of April 2016; only 4 months from now, there will be an additional 3% stamp duty on buy-to-let purchases or second home purchases.
The UK has 1.4m private landlords, many of those trying to save for retirement; indeed the ONS recently published a report stating that nearly 50% of people would rather have a buy-to-let property than a pension. Alas, it seems bashing landlords is a bit harsh, considering the good services they provide; that of providing private homes for rent.
Alas, unlike many commentators in the press we do not think it “catastrophic” nor will it choke off future investment in private rental properties but it will change the landscape.
How?
A: There will be a surge in buying pre April; a 3% saving is there, which considering the average purchase price of a rental property, is a c£5000 saving.
B: There will be a longer term suppression in transaction numbers, especially for the 6 months after April 2016. It is not dissimilar to what happened in Scotland when they hiked the stamp duty levels on higher priced property; there was a huge surge before the change in stamp duty, then a huge drop in transactions after.
C: For now, it seems that corporates and funds will be exempt from this rule, encouraging institutional ownership of residential property. Perhaps there will be more opportunities for larger landlords to hold units in a limited company or corporate structure going forward.
D: This does NOT affect you if you already own investment property or purchase before April next year; it is for new purchases only.
E: One can still buy a property below £125000 with only 3% stamp duty; perhaps more investors will seek cheaper lot sized purchases; and hence more of a focus on the Midlands and North of England.
So whilst not good, I think a more “holistic” view needs to be taken. The Government is encouraging supply, and is looking to curb excess buy to let activity (no doubt being urged by the Bank of England also). The residential property market as a whole should longer term be a more stable market and benefit from these changes.
Importantly;
- These changes DO NOT affect existing landlords.
- We DO expect strong buying prior to April 2016
- We DO expect more investors purchasing units at sub £250k, ie outside London and the South East
Another point is that this 3% stamp duty needs put into perspective; market commentators expect a 20-25% rise in prices over 5 years AND say a 5% rental return per annum. The 3% stamp should not alter investment decisions. Or another way of looking at it; a one off tax of 3% can be effectively amortised over the length of the investment; say it is held for 10yrs, then this equates to 0.3% per annum only.
Pensioners and others will need consider what they want to do with their precious life savings; equities, bonds, art, classic cars, cash or possibly a return to derivatives? OR a tangible investment that you can see/touch and most importantly understand! I know where my money would be.
