As you might imagine, we are receiving a lot of questions from clients and buyers as to our predictions for the possible effect of the recent SDLT changes on the market in the UK. So, here follow my initial reflections – but first, let me make a couple of comments:
1. Wealthy people generally don’t like paying tax. Non-wealthy people generally don’t like paying tax. Comfortable “in the middle” people generally don’t like paying tax. No one really likes paying tax, especially when they feel they do not receive much in return from doing so.
2. Last weekend I went to see a Financial Adviser who was working at a well-known High Street Bank. I wanted some advice on where he thought was an efficient place to invest. His top “tip”? An equity fund. Fair enough, you might say – but I should elaborate that, whilst the fund in question had lost around 3.5% of its value over the past 12 months, the “positive” news was that it outperformed the index (which they used to measure their performance and therefore remuneration) which had lost around 5%. And the really positive news was that their losses in the last quarter had been paired back ‘through efficient management’ and it had only lost around 1.75%. The cost of their advice 2.75%, should I choose to follow this wisdom and invest.
My recent trip to the bank had lead me to wonder how many people face a similar dilemma of how to efficiently invest their capital? The Financial Adviser would argue that you need to take a long-term view on investing and to a certain extent, I agree. However, from a more practical perspective, for someone who invested £100,000 in February 2015, their investment would now be worth around £93,000 (give or take) – hardly a ringing endorsement. Incidentally, the same bank also had a high interest account which would return 1.5% for amounts invested greater than £50,000 on the basis the money was tied up for a minimum of 3 years.
Despite the popular press trying to suggest otherwise, I don’t think your average buy-to-let investor is a super-rich tycoon living in the Caymans, waking up to a daily breakfast of champagne and caviar. The reality is that most buy-to-let investors are mums dads who pay their taxes and who are looking for a place to invest in which they feel comfortable and get a decent return, most likely to be with a view to their retirement.
I then began to wonder what the consequences are of the recent changes to SDLT to investment decisions. The proposed changes to SDLT have significantly skewed the tax position for your average investor. For example, an investor buying a buy-to-let unit at say £2,000,000 would be hit with a SDLT liability of around £213,750. If the same investor were to purchase four £500,000 buy-to-let units, their total SDLT liability would be £120,000 (£30,000 per unit). Therefore, by going with the four cheaper units they are saving £93,749 – in cash. Yes, you say – but you are using a rather extreme example… that may be the case, but if you look at:
- Three units at £500,000 versus one at £1,500,000 the saving is around £48,000
- Three units at £250,000 versus one at £750,000 the saving is £20,000
- And so on…
What effect will the impact of this calculation have on the already scarce supply of smaller, relatively more affordable homes that may previously have been available for first time buyers? It may not be positive for them….
At the other end of the spectrum, for an owner occupier who has lived in their own home for some time and has built up a significant amount of equity, it is now really expensive to move! Imagine a family who is living in their second or third home which has increased in value to £1.5 m – they are now looking to upgrade to a home worth say £2.5 m to get more space. This family now needs £213,750 in cash, or £288,750 if they intend to retain and let their existing property. Even if this is not the case and they do intend to sell their existing property, they are still going to have to stump up the £288,750 in cash before selling their own home and then claim a rebate back from HMRC which can take up to 18 months. Obviously, there all sorts of different permeations here; however, for all but a few, moving up on the housing ladder thereby creating a ‘slot on the rung’ for the purchaser below is either going to be financially impossible, or else not particularly attractive. For this group of buyers, perhaps a more feasible scenario is to stay put and invest funds which would have been used towards a larger family home either in home improvements (decreasing supply) or into a buy-to-let mortgage.
In concluding all of this, the consequences of these changes to SDLT seem likely to put buy-to-let investors and first home buyers into a particularly dangerous game of chicken. Having worked in property for a long time and been both a first home buyer and a buy-to-let investor in the past, I can tell you it is a much bigger decision buying your first home. Investors are more nimble, have greater debt capacity, bigger deposits and will be much more comfortable making quick decisions on purchases, particularly at lower price points.
If this is the case, when added to the acknowledged undersupply of homes in the UK (London in particular) and considered together with historically low interest rates and the governments’ new Help-to-Buy scheme for London, it is not hard to imagine a scenario where investors and first home buyers are both pushed into the same market and fight it out for the limited stock available.
In the absence of significant supply side increase, this could have a considerable upward impact on prices in the capital at some of the relatively lowest levels of affordability. I suspect this is not going to help first home buyers and may only serve to benefit buy-to-let landlords (and perhaps basement contractors….)