U.K. Homebuyers, Don’t Fret About the Stamp Duty Holiday
(Bloomberg Opinion) -- Here in Britain the only thing we enjoy talking about more than the weather is property.
And there is certainly plenty to talk about in property right now.
Hundreds of thousands of excited and very nervous Brits are scrambling to buy a new home to take advantage of a limited-time offer. In a bid to stimulate a Covid-ravaged property market, Chancellor Rishi Sunak, announced in July a stamp duty “holiday” — temporarily suspending the stamp duty land tax (SDLT) that must be paid on top of any home purchase.
Transactions completed before April 2021 up to the value of 500,000 pounds ($646,450) will be exempted from the tax altogether. More valuable homes will also benefit, but there will still be stamp duty to pay on the excess above £500,000. It is a tax relief that could save buyers up to £15,000.
Although the deadline is still many months away, it is already becoming apparent that many purchases will not be completed in time. The consultancy TwentyCi estimates that as many as 325,000 buyers could lose this valuable relief by missing the deadline.
But missing out on your dream home might not be the worst thing in the world.
The reasons for missing the deadline are many and varied. Most revolve around the administrative logjam caused by the coronavirus and the unprecedented spike in demand. For example, in some areas, local authority searches — a vital part of the buying process — are now taking five or six weeks to complete according to Property Industry Eye. Before the pandemic, a search would typically have taken less than a week.
Mortgage companies are also a frequent cause of delay. The surveyors who value your home for lenders are chronically overstretched and queues are lengthening. It’s also been reported that previously agreed mortgages are being rescinded, leaving potential borrowers high and dry.
So, what happens if you fail to close on your new home before Mar. 31 of next year?
Well, if you are a first-time buyer, fear not: There is already a longstanding exemption from stamp duty for the first £300,000 of property value. There is also the possibility the deadline gets extended as many in the property business are calling for.
Missing the cut-off date might also help you save in the long run.
The stamp duty holiday is an artificial attempt to shore up the property market, which has caused a temporary bonanza in market activity and a spike in property prices. According to the Nationwide Building Society, house prices are rising at their fastest pace since January 2015 (5.8% YOY). Yet as recently as May of this year, property prices suffered their largest monthly fall since February 2009.
There was a similar temporary boost back in 1988, which I have cause to remember very well. Back then it was possible to claim tax relief on mortgage interest. If there were multiple owners of a property, each of them could claim tax relief. In April of that year, then-Chancellor Nigel Lawson announced that he would end multiple tax relief programs — though only purchases completed after Aug. 1 would be affected.
Inevitably there was a scramble to lock in the tax incentive before the August deadline. For a while afterwards, property prices continued to climb. It was at this point I took my first, tentative step onto the property ladder. Three years later, I had the distressing experience of seeing a flat very similar to the one I proudly owned sell for almost 60% less than I had paid.
In 1989 the Bank of England’s base rate approached 15% as the authorities struggled to contain an overheating economy. Since property prices in London had risen 50% in the two years prior to the tax relief deadline, they had a long way to correct.
Today the bank base rate is just 0.1% and is unlikely to rise any time soon. Yet there are still grave causes for concern. Earnings have been hit hard by the pandemic, and the U.K. economy is already in recession. The poor economic outlook is also causing banks to withdraw their most competitive mortgage deals. This has effectively driven average mortgage rates above pre-pandemic levels, even as the base rate has fallen.
At the same time, the average house price is now more than eight times average earnings. According to Schroders, this has only happened once before over the past 120 years: immediately before the 2008 global financial crisis. The crisis led to a 20% fall in U.K. property prices and a 55% increase in repossessions.
So, if you do end up unable to buy your dream home before next April, console yourself with this thought: You may well have avoided buying in haste only to repent at leisure. And you may yet still grab yourself a bargain when everyone's a little less excited.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Stuart Trow is a credit strategist at the European Bank for Reconstruction & Development. He is also a pensions blogger, radio show host and member of numerous retirement, finance and audit committees.
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