Moths to the Sunak flame
Stamp duty holidays are always welcomed by just about every stakeholder involved, especially of course potential buyers as they have this aura of free cash, almost as if like in a Hollywood movie, something blows up and dollar bills come floating out of the sky and everyone rushes into the street to pick them up. That’s strangely how it makes people feel, like lottery winners, and their behaviour suddenly becomes conditioned accordingly, which is precisely what the Chancellor hoped it would do. Create a zombie army of house buyers who immediately ditch plans the following day to go to work, or mow the lawn and instead decide to spend all day online looking to view as many properties as possible with such haste that anyone would think they didn’t have 8 months in order to do it, but rather just 8 weeks. Mr Sunak has one tick box on his checklist. Urgency. Tick.
Now there are of course many reasons why this holiday is being introduced, but one that seems to get more airtime that all of them is the idea of saving money. I as I have pointed out in previous blogs, politicians and government ministers are so deliberately precise in their choice of language, in the words they use especially in the Commons, that reading them becomes very important and more often than not it is what they don’t say that becomes relevant. So, this is another good example. If you look at the transcript from his speech from last week, this is what Mr Sunak delivered.
“A market we need to be thriving. We need people feeling confident, confident to buy, sell, renovate, move and improve. That will drive growth, that will create jobs….The average stamp duty bill will fall by £4,500. And nearly nine out of ten people buying a main home this year, will pay no stamp duty at all”.
There is no reference at all to anyone saving any money, in fact all he quite purposely says is that a tax bill will fall. Now that is quite powerful stuff, don’t we all love hearing that a tax bill will fall, however, that news is only to be celebrated if it is bestowed on the taxpayer without required action in return. This usually happens in the form of the budget. Whilst sat in front of the TV listening to the usual diatribe the chancellor announces that the tax-free allowance will go up for example. We all celebrate and without having to do anything we are all automatically better off. Our tax bill has fallen just like the stamp duty holiday, but we have had to do nothing to earn it, it really is just free money, a genuine saving. The stamp duty holiday is anything but, but like moths to a flame, tens of thousands of hypnotised buyers will now rush out and buy a property as soon as they possibly can, and we have already seen the portals say that searching activity has increased over night.
So why is it not a saving? A small caveat. Those buyers that source a property straight away, this week for example may well not suffer from the undertow of market forces that are quickly about to change. Those that already had an offer accepted in the past few weeks will make a saving of course but they got lucky and were buying a property anyway, they have not been influenced to buy by the illusion of saving money, but good luck to them nonetheless, kerching kerching.
Three things will already by happening to one degree or another, all of which will quickly pick up pace in the coming days, weeks and months. A combination of all three means that the average £4500 “saving” that each buyer perceives they may save will be erased and they will be in fact paying more than if the stamp duty holiday had never been introduced.
Firstly, agents and developers experienced in their profession, knowing that the moths are flying will be putting prices up. Sellers will have higher expectations. A property that was £X,000 last week will now be that plus 2% perhaps, maybe 3% soon, then 4%, then 5% and so on. Unless buyers have been monitoring prices carefully, perhaps won’t notice, and many simply won’t care such is the need to cash in on this stamp duty giveaway. Some to be fair will understand the dynamics of what is happening but will see the advantages perhaps of a £4,500 cash saving versus a £10,000 mortgageable loss which over 25 years, will cost them very little per month. All the same, whilst they may recognise it, the “saving” is effectively no more than a bank loan.
Secondly, irrespective of sellers and agents behaviour, there will be many moths circling each flame, and competition especially sub £500,000 will be fierce. There will never be enough supply to satisfy the inevitable demand and sealed bids will the mechanism used to establish who is going to end up being the lucky buyer. Asking prices will become irrelevant as buyers will be forced to pay more and more if they want that property. Those that lose out in the process the first time they experience it, will make a stronger offer the next time they are faced with the stand-off, determined not to lose out a second time.
Thirdly, supply chains will be charging more for their product or service knowing full well that the surge of buyers will be unabated over the next few months. The list is a long one, but everything will get a little more expensive as everyone cashes in which is exactly what the chancellor wanted to happen. Lenders arrangement fees, surveys, solicitors’ fees, local authority searches, removal companies, carpet manufacturers, cleaners, builders, DIY stores. All supply chains in the housing market have suffered badly during this pandemic and all will see this window as an opportunity to address some of the deficit.
So, the property will be as much as 10% more expensive perhaps and the cost of getting it bought will be a lot more. The quid pro quo is Mr Sunak is offering these buyers a contribution of £4,500 towards the cost of helping save the economy, recognising they are making a sacrifice and taking one for team UK, albeit most don’t know that is what they are doing.
And that is what will have been discussed behind closed doors at number 10, and what us commentators in the industry know is what is happening. If we lived in a world where the whole honest truth was delivered in the Commons, Mr Sunak may have said this instead.
“In order to help save the UK economy, we need as many homebuyers as possible to step forward and help get us out of this mess caused by this pandemic. I need as much activity as possible happening in the housing market, generating much needed turnover for all the companies involved in the supply chains from banks to estate agents, from cleaners to surveyors, so that jobs are saved, and tax receipts increase. In order to make that happen I am going to persuade you all into rushing out to buy a property with a perceived tax cut, which is going to quickly force up prices, and make it far more expensive to get on the property ladder. See this stamp duty holiday as a £4,500 contribution towards funding some of that increase in expense and a thank you from the British people.”
Doesn’t have the same ring to it though, and I doubt it would be as popular and have the effect intended, in fact it would probably paralyse the market instead.
I am not trying to pour cold water on attempts here by the government to stimulate activity, and of course the Chancellor couldn’t have presented it any other way to that that he did. My point to buyers, is buy, but do so at least having been informed of the trade off that is taking place, do your due diligence and don’t let your hand be forced. It is what it is, but the government could have introduced a more controlled incentive to get the market moving that would not have led to the frenzy we are now about to see. High loan to value lending will no doubt be off the cards for even longer as banks know that many buyers may well actually end up in negative equity if they pay too high a price for a property at 95% LTV.
In creating stimulus, the government should have been asking, where is the logjam in the housing market, who needs the most help, how can we boost activity and at the same time solve conundrums that have been holding back a more stable, sustainable market for years? Instead of that they simply offer a perceived discount to all and create a boom and bust marketplace. Have we forgotten about the housing crisis already?
In recent years the challenges have always been at the top and bottom of the market. Crudely put, how do we got old people to sell up and free up the larger family houses and how do we make it more affordable for young and disadvantaged people to become homeowners? The older generation are even less likely to sell now they have seen how vulnerable care homes have been to Covid 19. Better to leave all their cash locked up in property to make a care home less likely. Incentives should have been linked to encouraging people to downsize, perhaps no stamp duty at all, maybe no council tax, and then a scheme like Help to Buy to free up lending, perhaps also with some stamp duty relief for FTBs, single parents, the disabled, those in social housing, those that need the help the most.
Getting these 2 groups mobile in the market would be grease enough on the wheels to get the paralysed middle of the market busy as well. 2nd & 4th time buyers are stuck without the lifeblood they need - people buying their properties and the next property to move to. A 2nd time buyer can’t move if they can’t sell. A 3rd time buyer can’t buy if the 4th time buyer they want to buy from can’t find a family house to buy as older people are not moving. We need people able to buy at the bottom, we need people at the top getting out.
This stamp duty holiday has addressed neither.