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Could stamp duty changes cause market surge?

Posted on 2016-01-26

In November's Spending Review it was announced that from April this year, purchasers of buy-to-let properties and second homes will have to pay an additional 3% in stamp duty.

For example, from April, a property bought for £300,000 as a buy-to-let investment or second home will generate a stamp duty bill of £14,000, compared to £5,000 paid by an owner-occupier purchaser.

A buy-to-let or second home purchase, meanwhile, which costs £150,000 will require a stamp duty payment of £5,000, compared to £500 before the new rules. For a further breakdown, you can view a run-down of the new rates on the NLA website.

The proposed new system, which is a Government initiative designed to increase owner-occupancy levels, has caused much debate in the weeks since it was announced.

The debate raises a number of important questions, here's an indication of what the experts think might happen:

Are the new rates likely to affect the market all over the UK?

As they were part of the Autumn Statement and Spending Review, the changes to stamp duty were only for England, Wales and Northern Ireland. However, in December's Scottish Budget it was confirmed that similar changes would also be introduced north of the border from April – albeit in a slightly different format as Scotland uses a system called Land and Buildings Transaction Tax rather than stamp duty.

Meanwhile, English landlords and property professionals have been wondering what effect the changes might have on different regions. Countrywide released a report which suggested that the new rates could effectively redraw the buy-to-let investment map in terms of which areas will provide the best returns for investors.

The report claims that almost 17% of properties sold by Countrywide in the West Midlands between January and October 2015 were to buy-to-let investors. Looking at particular cities, the figure rises to 41% in Leeds and 38% in Southampton – and it's these markets which will be significantly affected.

On top of this, investment advice firm London Central Portfolio believes the changes can be absorbed by investors in Prime Central London. The firm explained that this is due to such strong long-term price growth expected in the heart of the capital.

Could there be a surge in market activity before April?

One of the predominant topics of debate has been to what extent the changes will affect the number of purchases in the first few months of 2016.

David Whittaker, managing director of Mortgages for Business, said that the number of enquiries his firm has recently received for purchase finance is already well ahead of the level seen at this time last year.

Camilla Dell, founder of buying agency Black Brick, agrees with this sentiment.

"We are seeing a flurry of activity from potential buy-to-let and second home investors. We are also seeing an increased interest in sub £1 million properties, where the impact of the rise is lower than on more expensive real estate,” she recently explained.

Moreover, many lenders have been holding the equivalent of ‘January mortgage sales’ this month in order to kick-start the market, according to Mark Harris, chief executive of broker SPF Private Clients.

He predicts that lenders are likely to price aggressively in coming weeks in order to get off to a fast start in 2016 and that buy-to-let lenders will be 'extremely busy'.

North London estate agent and former RICS chairman Jeremy Leaf recently reported that he has seen a noticeable increase in landlord buyers, while the Property Investors Network claims that six in ten buy-to-let landlords intend to purchase additional property before the new tax rates are introduced.

Might the buy-to-let market experience a slump in the second half of 2016?

It is widely believed that after the new rates are introduced in April, there may be fewer landlords looking to buy properties. A number of industry players have spoken on this potential outcome, including the Council of Mortgage Lenders (CML), which says the buy-to-let market faces a 'challenging period'.

“We currently expect buy-to-let house purchase activity in 2016 to fall below its 2015 level, and for activity in 2017 to fall below the level seen in 2014” said the CML in a statement.

Property data firm Hometrack was clear in its assertion that transaction levels ‘will dip post-April’.

“The changes are set to slow the speed of growth in the buy-to-let market from spring 2016 onwards” said David Catt, the firm's chief operating officer.

Stephen Smith, a director at Legal & General Housing, said the reforms will dampen buy-to-let activity – particularly as landlords will have to deal with reduced tax relief in the coming years, while Kensington Mortgages' Steve Griffiths said he is concerned that the new system will make investing in property more complex.

What are the potential pros and cons for letting agents?

As landlords look to expand their portfolios in the first few months of this year, there is a genuine opportunity for letting agents to manage more properties. Dual agencies – with sales and letting agents – could also prosper before April if landlord clients purchase properties from the agency's vendors, which are then managed by the agency's lettings arm.

After April, if demand for new buy-to-let properties does decrease and the number of landlords entering the sector begins to fall, it will be important for agents to maintain strong relationships with their existing landlords, while working hard to capture the attention of those who do choose to enter the buy-to-let market.

The consultation

The Government has launched a consultation on the proposed stamp duty changes, which gives interested parties until February 1 to give their views.

The consultation states that the new rates will only apply to purchases which complete on or after April 1. If the completion takes place on or after April 1 but contracts were exchanged before November 25 2015 then the new rates will not apply. However, they will apply on any completion on or after April 1 in which the contracts were exchanged after November 25, when the proposed changes were announced.

The full consultation document can be viewed here.

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