Never truer words spoken than in recent weeks with the agonising campaign for an extension to the current stamp duty holiday that is due to expire on 31st March. Before I get into the detail though I would like to frame the views I am about to share in context of why I believe anything other than the smallest of extensions would be foolhardy.
I frequently make the point that “the wobbly line always goes up”. It does. This is the line that features in most articles on house prices that feature in the national press or house price tracking sites like Property Data. A simple 2 axis graph, £s in the vertical, months and years on the horizontal, and the line increasing at 45-degree angle from left to right but having little ups and downs as it climbs.
House prices roughly double every 10 years whatever pitfalls, recessions, and pandemics we encounter. It is however those challenges that keep the wobbly line on its upward trajectory, that act as a natural checks and balances system, a brake on the runaway train that slows it down when it speeds up too quickly and stops it from crashing. Having watched and studied the market for the last 30 years, I know this is how it works, and too much of a good thing too quickly is exactly that – too much, too quickly.
For those of us that are homeowners, a very British investment vehicle, we all want house prices to continue increasing and of course we would like to see that happen as fast as possible. However, no differently to a car journey from A to B, high speed may well result in running out of fuel, engine failure or worse still a crash and mean that trip actually takes longer. Better to drive there at a steady 70mph, or if inadvertently the speed creeps up to 80, then its sensible to then spend a little time cruising at 60 to allow the engine to cool down a bit.
This is where we find ourselves now. We have just driven part of our car journey in the second six months of 2020 not at 80mph, but at 120mph, flat out for 26 weeks, engine screaming. In context, we have seen the busiest housing market in that short spell since 2007. More transactions, and house price inflation that defied economic sensibilities. On the back of the first lockdown, in a recession, in an environment where lenders were very nervous and pulling mortgage rates as people started losing their jobs and confidence, when you would expect house prices to start falling as all commentators predicted, they didn’t.
Instead, they actually increased by 4.4% in the second half of the year after the stamp duty holiday started and by 7.3% for the year. What is notable though is that not one expert or institution predicted an increase of any sort, let alone this much, and this increase to all intents and purposes was manufactured which potentially makes it even more fragile. Most predictions were falls in prices and pretty gloomy.
Fragile because Mr Sunak mesmerised everyone with the stamp duty announcement back in July as I wrote about at the time. The Chancellor saw the car was about to stall, had to it stop at the Treasury Petrol Station and filled the tank with rocket fuel. That fuel is just about running out now as we speak, as the Nationwide announced that house prices fell by 0.3% in January 2021. New instructions are at the lowest for months as sellers have either sold already in previous months or realise they have left it too late to capitalise on the buyer activity that is also now starting to slow.
This isn’t a bad thing though, in fact its completely necessary if we want to see house price inflation continue to steadily increase, and the key here is steadily. Look at the dot.com bubble in the 90s. For any price increases to stick, they have to be justified and plausible, to make sense. Nothing increases in value overnight by x00% without people later working out it’s not really worth that much and we then see a massive slide on values to compensate. Look at Purplebricks. Worth about 15% of what it used to be after everyone was convinced to get excited about it, only to find out later it didn’t make any money.
So now is the time to reflect on 2020 as a great year for the housing market, one where very few buyers or home movers actually saved any money, but that wasn’t the intention of the stamp duty holiday. It was designed to protect jobs in a massive industry built on public confidence and stimulate economic activity. It is a time to slow the car down and cruise for a few months, let the dust settle, let the vaccination program run its course through the Spring, allow us to break the back of this second wave and have people come to the housing market because they want to move home, not because of yet more gimmickry tricking them into moving in their lemming like droves that fuels yet more artificial house price inflation on the back of that that we have already seen. It won’t stick. Bubbles burst.
Yet there are calls from some estate agents for the Chancellor to extend the stamp duty holiday, to refuel the ford fiesta and have us travelling once more out of control at 120mph all represented publicly as simply trying to help homebuyers who may not now meet the deadline of the 31st March and may miss out, triggering a cliff edge over which tens of thousands of deals will fall through, where dreams will be shattered. However, the behaviour they predict is likely to happen doesn’t make sense, nor does the extraordinary length of the extension a minority are proposing, so much so that anyone would be forgiven for thinking that those campaigning for one, simply want to dine out on yet more frenetic activity for a few months more.
However, it’s the nature of their proposal combined with the reasons why which have many commentators questioning whether they should have been a little more conservative with their ambitions in order to make them achievable. The pound signs flashing in front of their eyes, however, may have been a temptation too great to resist, but this is the problem with negotiating on an empty stomach. Reason goes out of the window and the people you are negotiating with can see your hand for what it actually is.
So, let’s play fair though and look at the proposals as to why a stamp duty holiday extension at all is needed and then why a long one of 6 or 9 months might be necessary.
One of the first claims is that thousands of house sales will fall through if the window is not extended. Now the first issue here is we all knew when the window was due to close when the SDLT holiday was announced in July, so why all of a sudden is it a problem now, why did no one call for an extension to the holiday when it first started? Nothing has changed since then; we knew many sales or purchases wouldn’t make the deadline in July and we know that today. The plain and simple reason is that anyone calling for an extension in July would have looked rather foolish as they didn’t have any real transaction data to back up any claim, which whilst they do now doesn’t change the fact that some sales will always miss the deadline, as sales are being agreed every day of every week. Deadlines are deadlines, they have to happen at some point. Not a reason to extend.
This theory was then extrapolated, to explain that it’s not just any old sales that are going to miss the deadline, it is sales that would normally have made it, but because the stamp duty holiday has been so popular, lawyers, lenders, surveyors are all snowed under and buyers shouldn’t be penalised for the popularity of the scheme. I do not accept this argument either. Buyers have had 9 months to get their deal over the line, even if it has been busy. Busy supply chains are the nature of the beast during a stamp duty holiday, everyone knows that. Not a reason to extend.
Let’s also look at the practicality of the claim as well. Why would all these tens of thousands of house sales fall through? Take a second, to imagine yourself as a buyer who is getting towards the business end of their purchase but is probably not going to make the 31st of March deadline. Would you simply pull out? I know many in surveys are saying they will, but what else would you expect them to say if they want to benefit? I believe very few would.
Firstly, a survey recently by Aviva, showed that only 13% of buyers in H2, 2020 were influenced to buy by the stamp duty holiday. That certainly rings true with why people buy when there isn’t one. Babies, new jobs, family, bigger garden, shorter commute are always the reasons people move and buy, not because of a small tax break, and it is small. The average house price at the end of 2020 was about £240,000 depending on whose numbers you run with. Bear in mind that most First Time Buyers are exempt from paying stamp duty anyway, so this actually only affects home movers. Based on that average price, the stamp duty saving is only about £2,100.
Now if you had spent more than that on mortgage applications, lawyers’ fees, searches, and surveys, and seen the price of the property you were buying increase in value by over £10,000 since you first offered on it, and you were the 87% that weren’t that motivated by the stamp duty saving in the first place, would you then pull out knowing you weren’t going to make the deadline? Pull out knowing you would have all those costs for a second time, would still have to pay stamp duty, plus £10,000 more for the same property, perhaps put yourself £13-15k out of pocket when the reason you were buying was because you had a new job or a baby coming? I don’t think so.
Furthermore, the average purchase price during the holiday has been about £175,000 making the saving even lower than £2,100 and what half decent estate agent wouldn’t be able to negotiate part or all of that from related sales in the chain. Most buyers are saving £1,500 or less. The fall through cliff edge is the stuff of fairy tales, an urban myth that many buyers have come to believe though.
However, playing devils advocate for a second, let us entertain these delayed sales for a moment. If the government was to look at granting them some wriggle room, how much would they realistically need? Those sales which are pretty much oven ready, but as there is a bottle neck at the end of March, it isn’t physically possible to get them all through in a 2-week period. Another 2 weeks? 4 weeks perhaps?
Shouldn’t be too long as we are told that these sales by definition will just miss the deadline which is seen as an unfair close call. More than a month required wouldn’t really mean they are pretty much ready though. So why are some prominent estate agents calling for a 6-month extension or in one case, from an MD of a large agent in the Thames Valley, a whopping 9 months, saying, “it would only be fair for it to be extended until the end of 2021”. Fair for who? Another half a million people who haven’t thought about moving yet this year?
Anyone would think that a lot of these particular agents had had their bonus plan rolled out for 2021, which had their targets conservatively set knowing that Q2 and part of Q3 were going to be tough, only then to see an opportunity whereby if the government extended the holiday by a few months, they would smash their targets simply as buyers would be queueing up once more, and a whopping bonus was there for the taking at the end of the year. Cynical? There isn’t an estate agent alive who wouldn’t financially profit quite significantly from an extension which is why many of them signed the petition calling for one, and why they went long on the calls for months and months. The longer the better, but therein lies the problem though.
In all fairness, I don’t blame a single one of them, and who would? Most agents to be fair have been quiet on the subject, but all would of course love to see it extended. Given the choice between a tough Q2, grinding out results, week after week, sales and commissions being hard won, or instead getting back on the stamp duty roller coaster of the last few months, kerching, kerching, which one would you choose? No brainer.
There’s no point scoffing at their desire to succeed or make money, it’s what makes the world turn, but what isn’t so admirable is the attempt to convince the rest of us that it is anything other than that. That their proposal, tissue in hand, mopping a tear from their eye, is only a caring thought for their poor buyers who might not be able to claim the saving and nothing more.
There is no cliff edge, everyone knows when the 31st of March is and has done from the start. There will be no dirge of fall throughs. There is perhaps an argument for government to be fair and allow sales that exchange by the end of March a small lee way on completion as there simply isn’t enough removal firms for example to physically move everyone in time, but that’s an April or May extension only, not September or December.
Even if there was a cliff edge, what would an extension do to avoid one, all you are doing is kicking the can down the road and creating a new cliff edge in the Autumn. What then? Copy and paste? Another extension request?
Whilst no one would have ever have the gumption to come out publicly and say it, any agents or other stakeholders that are calling for the long extensions who having taken truth serum would instead say, “Crikey, we had so much fun, sold so many properties and made so much money during that stamp duty holiday, it would be amazing if we could do it all over again. Can we have a second holiday?”
That’s a sentiment that is familiar to me, but it’s not a reason to extend the holiday and risk a significant price correction after it, just when we are trying to navigate our way out the mess left by the pandemic and after the inevitable tax rises have been introduced. I have worked in some runway markets, and it is a lot of fun, you do sell loads and you do make a lot of money. That’s the honest reality but not one that is being shared currently and that’s why the government hasn’t taken it that seriously.
The request is so completely lacking any serious foundation that it was always likely to be seen for what it is and rejected out of hand as the devolved governments have already done in Wales & Scotland. Jesse Norman has thrown campaigners a diplomatic commiserating bone from the top table though, implying that there is possibly grace for sales where the Treasury considers “substantial performance” has been achieved. To me that sounds like an exchange of contracts, but we are unlikely to find out before the budget on 3rd March.
Whatever the outcome it seems pretty clear that there will be no practical long-term extension that creates yet more frenetic activity in the market for another 6 or 9 months, so the petitions over ambitious timescale has been its downfall in its ambition to reset and go again for the rest of 2021.
One month, two maybe, possible three as the government likes to work in quarters to measure economic output (GDP). Such was the enthusiasm and excitement at the potential replay of the holiday that many got carried away with their suggestions, but six months plus was never going to carry much credibility.
Always better to negotiate when well fed.
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