In writing this I had constant image in my mind of the scene from the jungle book with Kaa the hypnotic snake and Mowgli, where she hypnotises him and he falls into a trance ready to do his bidding like rushing out and buy a new hut in the jungle perhaps. That obviously didn’t happen, but it feels like that’s what the Chancellor has done to the buying public with the introduction of the stamp duty holiday, as I couldn’t fathom why in early November I am still seeing reports of thousands of buyers desperately looking to buy a property before the deadline at the end of March.
To start with I questioned what the missing link was, to be driving this buying frenzy so late in the year, when we in the industry know there are very few compelling financial reasons to be buying at the moment in recent weeks. People need to move of course even during recessions and pandemics whatever the economic climate. Rightly so, and they should do so without anyone telling them otherwise, but as the numbers involved far exceeded those that are doing that alone, I suspected that many of these additional buyers had fallen into a stamp duty trance, fooled by all the hype, the “Buy, Buy, Buy, Save, Save, Save” slogans everywhere and hadn’t considered the macroeconomics that surrounded the holiday. So, if there are any buyers out there that have fallen under Mr Sunak’s spell, this blog is for you.
If you are currently buying a property or looking to buy a property, this impact of this piece will vary depending on where on your journey you are. If you had an offer accepted a couple of months ago and you are well on your way to securing an exchange of contracts, you will be quite pleased with the choice you made earlier in the summer, and so you should be. If you are about to start looking for a property or are just in the process of negotiating a purchase, then it could be the prompt for some reflection on whether it is the right thing to do.
Finally, if you had an offer accepted in more recent weeks, and have already committed time and expense in moving forward with your purchase then you will no doubt become perturbed, even irritated by the implications of what that could mean having read this, but equally you may not. Horses for courses. The purpose here is to create some transparency for buyers, so at least they are making an informed decision about what to do. There is a lot of smoke and mirrors out there currently that I believe is preventing them from doing so in many cases, so call me a flag bearer for people to do so with their eyes wide open.
Let me start by framing this in context of what I predicted would happen in an earlier piece when the stamp duty holiday was first announced in July. To start with I made the point that for those buyers that acted decisively and pretty quickly went out and secured a property to buy, there would indeed be a saving to be had as the Chancellor suggested, £4,500 for the average buyer. Kerching kerching. If you were looking to move anyway then this was indeed a significant tax give away and saving to be taken advantage of. However, if any decision to purchase was delayed through into August and September, then I forecasted three things would materialise.
Firstly, that all the activity created by these moths all flying towards the Sunak stamp duty flame would lead to sudden and aggressive house price inflation, which is why you had to be quick to avoid it. Depending on whether you follow the Halifax or Nationwide index, we have so far seen an increase of nearly 6% just since the lockdown ended but bear in mind there is a lag of activity in these figures. What is happening with record sales months being reported by Estate Agents on the ground means the prices being paid are far higher than this and closer to the 10% I suggested would be a likely outcome.
Secondly, these flames would be fanned by a relative shortage of new properties as we go into the Autumn with a huge number of buyers still competing for what’s left. I hear anecdotal reports of this happening almost every day.
Thirdly, supply chains in the housing market would take advantage of this frenzy, especially after a stagnant period during the lockdown and put up their fees and charges which is exactly what Mr Sunak craved. The chancellors’ plan had nothing to do with offering people a saving to help people onto or up the housing ladder as presented. He was simply after the economic activity that would protect jobs, take pressure off the welfare state, and create an enormous windfall of VAT, and what better way to create that than in the housing market, one of the biggest producers of Value Added Tax. So, surveyors, mortgage lenders, lawyers, conveyancers, removal firms, all whose services and products are in significant demand, have all increased their fees to these hypnotised buyers.
Whilst my forecasts were largely accurate, they were even then still very much understated, such has been the lemming like behaviour of buyers towards the cliff edge that I will come to. In August, mortgage approvals topped out at 85,000, the highest single month since 2007. The really chilling thing to consider in context, is that pretty much all 95% mortgages, most 90% mortgages and a good number of 85% mortgages have been pulled by lenders such is their nervousness about all this activity and the speed that prices have increased. Some have even restricted lending to 40% deposits. On top of that, many thousands of mortgages have been declined as lenders tighten up underwriting criteria and deny credit to those who are not the very lowest risk, and yet record numbers are still being recorded.
I have maintained in other publications that this was not the right course of action for the Chancellor to take. If stimulating activity was his goal, then yes a stamp duty holiday is one way of doing that, but they have to be tempered with other considerations and I believe constructed in a targeted way to grease the wheel of the parts of the market that need them most. The current challenges in 2020 for the housing market are how to make it more accessible for the low paid and FTBs and how to encourage the older generations in larger properties to downsize. Solving these two conundrums would provide some steady and sustainable growth to keep the economy tracking on a modest upwards trajectory which is necessary to distance ourselves from a boom and bust scenario.
The problem with this 2020 SDLT holiday was it was not targeted and it was too generous – a hand grenade indiscriminately lobbed in through the front door of the housing market, designed to have maximum impact in as wide a space as possible, and that’s why Stamp Duty holidays are very unsophisticated blunt instruments. There were other tools available to Mr Sunak to stimulate activity, dramatically reducing VAT for example for a period. Instead, this holiday has basically created a housing market that is out of control, a runaway train whose brakes have failed and is hurtling towards the cliff edge of the 31st March, as more and more passengers try and grab hold as it flies past seemingly in denial or in blissful ignorance about the possible outcome.
The cliff edge that has been reported in the news nearly always refers to this date of the 31st March when those wanting to qualify for the reduction in stamp duty have to complete, but there is a far more worrying hazard on this runaway journey we are headed towards as stakeholders in the housing market are simply getting drunk on the activity that exists here and now before the Chancellor closes the bar. Either they haven’t considered the hangover that may follow, or simply don’t care, but I will come back to this shortly.
So, a stamp duty completion deadline always creates issues of timing. I remember when the additional property stamp duty deadline was also set on 31 March 2016, the spike in extra transactions was significant as people looked to avoid the tax rise in time. Those extra sales though pale into insignificance compared to what we are seeing now. I have seen forecasts that suggest as many as 330,000 sales may miss the deadline, even with nearly 5 months to go. This is mainly driven by the fact that social distancing has slowed down our supply chains considerably, less surveys can be done in a day for example and a huge number of staff in these supply chains have been on furlough until last week.
The sides of a sales funnel are fixed, so when you pour water in at the top, you have to do it in a controlled way so as not spill any. This stamp duty holiday has been the been the equivalent of thousands of gallons of water having been pumped into a much smaller funnel that cannot cope with the volume. Laywers, conveyancers, lenders are have been saying for weeks that they cannot cope, and transaction times will be a lot longer, so current forecasts have those 330,000 gallons of water being spilled – fall throughs (FTs) as they are called in the industry.
A spike in FTs always creates a vacuum in housing market activity, which is then compounded at the same time with the tax break itself ending. If this 31st March cliff edge materialises then tumbleweed will blow down streets of the UK for at least the 3 months that follow. Prices will drop, will be forced down by Estate Agents searching for that sweet spot that then tempts buyers to return to a more conventional market.
Many trade bodies have written a group open letter pleading for the Chancellor to extend the stamp duty window to help avoid this impending catastrophe, but this will only kick the can down the road. They argue that an extension of 6 months to September will give enough time for these 330,000 sales to make the new deadline, but they do not comment on the Elephant in the room. What then happens to all the new sales agreed in the Spring when we all know they won’t make the revised deadline? Did they not consider this in their proposal? Of course they did, they just want to carry on drinking at the Sunak bar, and get a lockin for another 6 months, whereafter a copy and paste of the first letter will be issued asking for a new cliff edge in 2022.
The only way to tackle this March cliff edge is to taper the holiday to end 3 months later in June with incremental increases in the tax so it returns to normal in July, so at least everyone will still benefit from some kind of saving. The government recently did this with Section 24, increasing taxation effectively on a Landlords income in an attempt not to spook anyone. Tapers work well to negate cliff edges.
What I don’t understand however, is why any of these buyers would potentially withdraw from a purchase if they don’t benefit from the average £4,500 saving when you consider what has happened over the course of the summer and autumn. If you are one of the decisive ones that agreed a sale early on in the window, you will comfortably exchange before the deadline anyway, so it isn’t relevant. If however, you were late to the party and have only more recently secured a purchase then the stamp duty is really the least of your worries when it comes to the extra costs involved, and assuming you realise this, there must be very motivational reasons for you still going ahead.
I have always maintained that buyers should move for life changing, emotional events, whether new job, new baby, bigger garden etc, and focus less on making money, so for those that are entering the market for these reasons I salute you. I say, I assume you realise this as many buyers have no comprehension of the market forces I alluded to in my blog earlier in July, and this is borne out by many anecdotal conversations I have had with family and friends, a great number of whom have bought or considered buying in recent weeks.
So, if you are a buyer that is motivated by saving money and buying at a relatively beneficial time in the housing market cycle, I am afraid this isn’t it. Let’s attach some numbers to what potential savings there are in buying now, and the additional costs that have accumulated since July. Let’s start with an average house price, an average buyer. The Stamp Duty saving will be £4,500 if you make the March deadline, slightly less if April, slightly less if May etc if my taper suggestion was adopted by government.
Now to the extra costs the Stamp Duty holiday has created. If the average property price is circa £250,000 today, the highest on record, that property is today costing you between £15,000 and £25,000 more than it would have done in July if the Chancellor had not introduced the holiday at all. Most commentators were agreed at the time that prices would probably fall over the summer, let alone increase and if they had of done, they would have saved most buyers a lot more money overall than they are now saving on Stamp Duty, but this has never been about saving buyers money, in fact quite the opposite. Buyers have been used to kickstart the summer economic recovery.
“You had me at Hello”, is a famous line from Jerry McGuire most people are familiar with that is now used in common parlance to tell people that they don’t need a long drawn out explanation and they are convinced already. Most people I speak to who were about to move were convinced after this point on house price inflation alone long before we started talking about all the other costs. Some still moved anyway, but they equally understood what was going on. Mortgage rates even for the lowest risk buyers have increased by at least 10% since July, more for those that have a less credible track record. Mortgage valuations are more expensive than 4 months ago, mortgage arrangement fees, survey fees, solicitor fees, and removal costs have all gone up by 10-20% and why wouldn’t they? All these services are in massive demand and these businesses have an opportunity to address some of the lost income from the lockdown. Market forces, nothing else. Supply and Demand. These additional sums pretty much negate the stamp duty saving on their own, let alone the additional cost the property itself.
With this explanation I have seen buyers crash into the change curve I like to refer to often. Shock, denial then anger are the first emotions which after time recede and an acceptance of the facts prevails and that’s the point. These are facts, not opinions. In the cycle of house buying, if you aim for your move to cost you as little as possible, then this is not the right time, and this is reinforced by the spectre of my second, more worrying hazard I referred to earlier, when it won’t be long before many of these additional costs along with the stamp duty holiday disappear, and prices will start to fall. The upshot will be that that is when a buyer stands to make some significant savings, even if they have to pay the normal rate of stamp duty.
Without boring you too much there are simply contextual laws of economics that dictate whether house prices are likely to go up or down, so I’ll rattle a few off in context of 2020 before I knit them all together.
House price inflation, even in the safest economic environments does not increase by more than 6% per annum without some alarm bells sounding. For growth to be sustainable it has to be organically created at a pace commensurate to the environment. Remember the dot.com bubble? – What goes up too quickly will soon come back down as quickly sometimes with a bang. A healthy economy with high employment increases tax receipts, confidence, consumer spending and GDP – all happening together they support each other, and the growth continues. None of these are sustainable with short term gimmickry. As soon as the gimmick goes the growth and confidence disappear as well.
So, let’s look at the micro market of 2020-21. At the start of 2020 house price inflation had made a modest but steady increase and the signs were looking promising for one of those encouraging years where we might have seen price increases of 3-5%. Brexit nerves had vanished, we had government with a strong majority. Then Covid 19 arrived and more importantly the lockdown.
The economic shockwave of the March lockdown is really yet to be felt by most of us. Yes a lot of people in certain industries have lost their incomes or jobs, which of course is regrettable, but they still remain the small minority and have been isolated in lower paid, lower skilled jobs, whose absence is not quite as damaging. It soon became clear in March to most commentators that some significant challenges for the economy would be faced in the coming months and through into 2021, not least of which furlough ending/unemployment rising, the brewing social housing/PRS crisis, another 6-9 months of CV19, a second lockdown, inevitable tax rises, and possibly leaving the EU on WTO rules. A nasty cocktail of economic events that could destroy confidence, one casualty of which would be house prices. Most predicted prices would fall by 8-10% in 2020.
However, the Chancellor then reached for his box of tricks and produced the stamp duty holiday, after which as I write today, prices have increased by over 7% this year so far, which is also net of the drops we saw in the lockdown, so that is seriously bucking the economic backdrop. The CEBR has revised its forecast for 2021 as a result to a fall of 14%. Moreover, a recent report shows that 50% of transactions since July have been down valued as lenders become very nervous, hence they have pulled a lot of the rates I referred to earlier, and have become far stricter with their underwriting. They are anticipating a drop in prices.
So in summary, prices in 2020 by the end of the year will have increased by about a net 10%, when at the start of which, was going to be seen as a good steady year was going to be at best 5%, which most would have been happy with. In March we saw forecasts dropped to -10% due to the shock of the lockdown, so in effect we have seen an unprecedented 20% swing in prices and during a recession, all brought about by the stamp duty holiday. When all those economic threats above still exist going into 2021, and we enter a second lockdown to combat the second wave, with the inevitable additional economic damage that will cause, where is the safe money on whether prices will remain the same, go up or go down?
Many Estate Agents have come out in recent days to predict house price increases of 20% by 2025, but they do so without having to commit of 2021 in an attempt to shore up the confidence of those buyers currently in their pipeline, and I don’t blame them. Most agents are hiding behind the proverbial sofa, squinting with one eye open as the monster in the horror movie is about to appear, scared of a pipeline collapse as many come to realise that they have not properly considered why they have to decided to buy a property in recent weeks. The “Why” is really important. The “Why” is about confidence, not parlour tricks designed to trick people into doing something they would not ordinarily.
And that’s the point here – three considerations in writing this. I am not trying to poke the industry in the eye, talk the market down or create a pile of FTs for agents. After all a healthy housing market is very much in my interests and that of my clients, but that is why this needs addressing because where we are is far from healthy.
Firstly, some heat needs to come out of the market, and I am afraid agents won’t thank me for saying that, but it is in everyone’s interests that it does in the medium and long term. That means less new deals being agreed as we go into the New Year, yes, a certain number of FTs as buyers reconsider, and no extension to the stamp duty holiday many have requested, but the taper instead. House price inflation in context of this pandemic cannot keep rising by 2% a month. It is an artificial increase that lenders recognise and that will vaporise next year. There is no point fuelling the fire only for it to burn itself out; that will have far longer reaching consequences for all.
If the market quickly calms down, and gives the supply chain more capacity, more of the sales already agreed will make the March deadline. Ironically, more new sales going into the supply chain will lead to more falling through as they all get less attention. Everyone already recognises the March cliff edge is a problem, so why make it a taller cliff? Many independent commentators are predicting house price deflation for 2021. Why make that fall greater than it needs to be, and the vacuum of confidence that comes with significant change? I know the answer for some will be “more commission” but over the 12-24-36 month cycle it will be less commission.
Secondly, and conjoined to the first point, buyers need to decide their “Why” for the right reasons, an informed decision based on the facts. I am, believe or not, not suggesting that people shouldn’t buy a property at the moment, that is completely their choice, but I wish more people did it for the reasons that matter to them and not other people. So, if you are a buyer who has agreed a purchase in recent weeks and you are aware of the all the changes in market dynamics, the extra cost, and that the stamp duty holiday has effectively been a cheeky ruse by the Chancellor to get you off your sofa and spending lots of money, then good luck to you. Likewise, I personally don’t sign up to all this paranoia about house price deflation and trying to time the market precisely. So what if there is some house price deflation in 2021, even if it is 10% or so. It will bounce back quickly in 2022/3 anyway, and the value is only relevant if you need to sell it.
Thirdly, most buyers won't remember how stressful buying a property is, buying one in a stamp duty window is doubly so. We have enough mental health challenges in society as a result of the pandemic for various reasons, hoodwinking people into buying a property under what are effectively false pretences doesn't feel appropriate. There will be aborted sales, wasted money, anxiety, divorces.
However, there will be some buyers out there who all this will come as a shock to and may now want to reconsider, but they deserve to know the facts and would not have been buying a property in the first place had they been given a copy of this 2020-21 risk assessment in advance, and that’s all this is. A risk assessment for buyers, some who won’t care and will embrace any risk, some who will be indifferent and will kind of know what was going on, and then some who will run a mile, but thankful all the same that they now have time to consider what they want to do.
All 3 have one thing in common – they are all choosing their “Why” with their eyes wide open, free from the influence of Mr Sunaks’ stamp duty spell.
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