property investment

In June, we saw stamp duty tax breaks reduced from a maximum saving of £15,000 down to £2,500. On 1 October 2021, the original £125,000 nil-rate-band was reinstated amid suggestions that the market would begin to slow. However, there is evidence to suggest that stamp duty concessions were actually counter-productive in real terms. Is this true? 

Frenzied buying leads to property price increase 

There is strong evidence that buyers were determined to push through their property purchases before the end of June when the nil-rate-band fell from £500,000 to £250,000. However, even though a strong appetite for UK property attracted many sellers, these were far outnumbered by potential buyers. Consequently, there was a significant increase in the value of UK property between July 2020 and the end of June 2021, when the full stamp duty saving was in place. 

Evidence from Nationwide confirms that:- 

  • The value of a typical property (circa £245,000 in June) increased by £24,500 over this period, but stamp duty savings only equated to £1,900
  • A £500,000 property increased by approximately £57,000 over the same period, against stamp duty savings of £15,000 

So, while many investors in the UK were more focused on stamp duty savings, they were paying an awful lot more for that dream home. The fact that June transaction numbers of 213,120 were 108.5% higher than the previous month says everything. We can only estimate the impact this has had on UK property prices in isolation. However, we do know it was significantly more than the stamp duty savings. 

Were buyers desperate to complete before the end of September? 

Figures from Nationwide confirm that house prices increased by 0.1% in September (10% annual increase) compared to a 2% increase in August (11% annual increase). While there are also other factors to consider, such as stretched affordability and inflation, this was not the pattern we saw towards the end of June. 

If we look at the three month periods before the end of June and the end of September, this gives a good comparison:-

 

Month

Monthly Percentage Change

Annual Percentage Change

April 2021

2.3%

7.1%

May 2021

1.8%

10.9%

June 2021

0.6%

13.4%

 

 

 

July 2021

-0.7%

10.5%

August 2021

2.0%

11.0%

September 2021

0.1%

10.0%

 

Even though there was a partial recovery in August, using seasonally adjusted data, the current figure is nowhere near the 13.4% peak annual growth in June 2021. Ironically, while these figures are indicative of the broader housing market, they are based on the average house price, which stood at £248,742 in September – still below the reduced £250,000 stamp duty nil-rate-band. 

Finely balanced markets 

Even a relatively modest reduction in the number of properties for sale and an increase in the number of buyers can significantly impact prices. History shows that even in times of financial distress, there has always been a strong backbone of demand for UK property. Consequently, the introduction of tax breaks in the shape of increased stamp duty nil-rate-bands can, to a certain extent, create an imbalance in the market. 

This is not the first time the UK government has been accused of introducing counter-productive incentives for house buyers. We have seen the same with first-time buyers, offered financial assistance by the authorities, which allowed new property builders to increase their prices. When considering a financial transaction, it is vital to note the headlines but also look at how the land lies behind the headlines. In this instance, the increase in property prices (partly due to the stamp duty changes) was far more significant than stamp duty savings. 

The devil is in the detail 

While it was obvious that property prices would be supported to a certain extent by the staggered stamp duty savings, to what extent will surprise many people. As you can see from the above figures, the increase in property prices over the term of the staggered stamp duty savings was far more significant than the savings themselves. Thus, prices were pushed higher in what became something of a self-fulfilling prophecy, effectively “manufactured” demand for property. 

As well as arguing that buyers potentially paid over the odds, this has moved the bar even higher for future first-time buyers. Will they receive any financial assistance? Will the cycle begin once more?

 

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