Should I stay or should I go?
The number of blows to the property market over the last year or so has been impressive: a huge hike in stamp duty, with additional woes for buy-to-let investors and second home buyers; a Mortgage Market Review to provide more boxes to tick and exclude good buyers from the market; an overhaul of ‘non-dom’ taxation and an extra tax for ‘enveloped’ dwellings.
The Stamp Duty Land Tax (SDLT) reforms have been the major headline. At the lower end of the market it reduced stamp duty levels, graduating them so that there are no longer slabs where the rate suddenly increased. For any buyers over £1 million, moving has become very expensive: on a £6 million purchase the stamp duty costs for a first home will be about £633,750. You can’t borrow this so it is a straight hit on capital. It’s a significant hit too – the stamp duty on the purchase would be equivalent to four years’ rent on the same property. The implication of this is that the time horizon for buying has been pushed out and speculators and developers, those coming to London with a four or five year time frame, are now excluded from the market.
Law of diminishing returns
What is not clear is the motivation behind this. If it’s revenue generation then it has not worked as turnover is down at the upper end – about 30% – and SDLT receipts correspondingly reduced. This is the Laffer curve in action – where increased taxation reaches a point where the amount of tax raised actually goes down.
Property (and capital in general) is going to be in all governments’ sights as it doesn’t move and is often owned by those that don’t vote. But a transaction tax must be the worst type of property taxation as it is a tax on mobility – and lack of labour mobility is the big disadvantage of an economy built around home ownership. This applies at all levels of the market – even more at the lower end where there isn’t the spare capital to pay it.
The government’s property strategy (if there is one) seems to be different at each end of the market and surrounded with contradictory messages. At the lower end they have made it quite clear that owning is good and renting is bad: increased taxation on buy-to-let investors is bound to decrease the rental housing stock and the Right-to-Buy policy is set to do untold damage to the good work that housing associations do to provide affordable rents. The trouble is that the very people that are having the rental option taken away are the same people for whom buying is neither sensible nor possible: they don’t have the earning profile to qualify for loans that the Mortgage Market Review has made more difficult to obtain. We have already seen how the message at the other end of the market is quite the opposite.
Other drivers over the last year have been currency movements and the collapsing oil price. Any US dollar purchaser (and this includes US dollar proxies such as the HK dollar) have seen their potential purchase get considerably cheaper and we are seeing active interest here. In the case of the Middle Eastern buyers however, the falling oil price has trumped any currency advantage and some of the big investors in London property have become sellers. Russians, with the double whammy of the rouble and oil, are not surprisingly thin on the ground. It is in some of the new developments that currency stresses may become apparent. Most are funded by an initial deposit (sometimes as low as 5%) and stage payments as the project gets built out. For Malaysian or Indonesian investors, what was seen as a call option on the London market has become distinctly unattractive as the plunge in the ringgit and rupiah has made the next stage payment between 20% and 30% more expensive.
A crowded secondary market and strong indications of oversupply must have many of these investors considering their alternatives.
While London has visibly rocked under the taxation blows being rained on it, the country market has seen something of a renaissance. This is rather curious as, on the face of it, the same pain is being suffered as in London. There are a couple of possible reasons for this. The first is the valuation gap between London and the country, which widened to a chasm after the financial crisis broke in 2008. What this did was to put a break on many natural migrations out of London as sellers were reluctant to make a move that might be only one-way; they were frightened that if they traded out of London they may never be able to return. The price movement is now the other way. This same gap gives London sellers more willingness with which to pay the increased tax on a purchase that is nearly always long term; they are thinking 20 years ahead and with that sort of time horizon, family drivers take front seat and transaction costs are easier to swallow.
If all this sounds like doom and gloom, it is not meant to. London remains, for all the reasons too well rehearsed to be repeated here, a city to which the world is still beating a path. But an almost uninterrupted bull market over more than 20 years creates speculative froth – and that is being blown off at the moment by a mixture of world events and a chancellor in need of readily available cash. Last year saw all of this, but at the same time sellers seemed to think that nothing had changed and that premiums rather than discounts were the order of the day. The good news is that buyer’s and seller’s pricing aspirations are becoming more aligned. It is at the inflexion point that the market stalls. We think we are beyond that now.
Please note: This article is for information purposes only. Readers should seek specialist advice for their own circumstances.
Call option: an option to buy assets at an agreed price on or before a particular date.
Ringgit and rupiah: Malaysian and Indonesian currencies.
Secondary market: A market where investors purchase securities/assets from other investors rather than from issuing companies themselves (primary insurance).
Laffer curve: Shows the relationship between tax rates and tax revenue by governments.
Right-to-buy scheme: Helps eligible council and housing association tenants in England to buy their home with a discount.
Buy-to-let: Purchasing a property with the intention of letting it out.
This article is issued by Cazenove Capital Management which is a trading name of Schroder & Co. Limited, 12 Moorgate, London, EC2R 6DA. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Issued in the Channel Islands by Cazenove Capital Management which is a trading name of Schroders (C.I.) Limited, licensed and regulated by the Guernsey Financial Services Commission for banking and investment business; and regulated by the Jersey Financial Services Commission.
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