It is safe to say that property investors in the UK tend to get twitchy ahead of government budgets. Historically, this has been an area seen as a ripe money tree by many politicians. While this year numerous property experts were suggesting Boris Johnson would reverse some of the recent tax/regulatory changes, many investors would be happy with a non-event. So, what did the 2020 budget bring the UK property market?
The simple answer, next to nothing
As had been expected, the majority of the focus from the Chancellor of the Exchequer fell upon the ongoing coronavirus. We have seen huge investment put aside for the UK NHS and a promise that “whatever funding is required will be found”. When you bear a mind that this budget was accompanied by 0.5% reduction in UK base rates perhaps property investors had already received their surprise?
Small tweaks to the property sector
While there was nothing major in the budget for property investors to shout about, there were some relatively small tweaks which included:-
- A £600 billion package to be spent on roads, rail, broadband and housing by mid-2025
- A £1 billion fund to remove all unsafe combustible cladding from public/private housing higher than 18 m
- A £1.5 billion fund for further education colleges to upgrade their buildings
Then we saw the only real significant adjustment to the UK property tax system which involved:-
- A 2% stamp duty levy for foreign investors acquiring property in England and Northern Ireland from April 2021
In many ways, while the property market as a whole has become something of a money tree for politicians, foreign property buyers tend to attract the most attention. So, will a 2% stamp duty levy for foreign property buyers make a huge difference?
Recent exchange-rate movements
While sterling has partially recovered in light of Boris Johnson’s significant Westminster majority, and a degree of visibility regarding Brexit, it is still well below the figure just prior to the 2016 EU referendum. So, yes a 2% stamp duty levy for foreign property buyers will be a significant amount of money on some of the larger investments but minuscule compared to the fall in the exchange rate. Will this make a difference to ultrahigh net worth and high net worth individuals acquiring London property?
The simple answer is that those looking towards the luxury end of the London property market will see this as an additional cost but not necessarily a deal-breaker. Those converting their funding from dollars into sterling will already have seen a significant uplift since 2016.
The process of reviewing how combustible cladding was allowed on council tower blocks continues to move forward at an agonisingly slow pace. How has it taken so long for money to be put aside after the Grenfell Tower disaster? Why has nothing been done about the numerous number of buildings still encased in the same type of cladding used on the Grenfell Tower?
There is still a huge amount of work to be done with regards to the safety of both council and private accommodation surrounded by this dangerous material. While there have been reports, discussions and meetings, what has actually been done? In recent months we have seen a number of private homeowners stepping forward to suggest their homes are now worthless due to the cladding used with many unable to afford the cost of changing it.
We know there is a strong correlation between the property market and the economy so how does 2020 and beyond look for the UK?
Economic growth to the financial year end 2021 has already been downgraded from 1.4% down to 1.1% and this was before the coronavirus outbreak. Growth was expected to rebound to 1.8% to the tax year ended 2022, then fall to 1.5% in the tax year ended 2023 and 1.3% in the tax year ended 2024. In light of the devastating impact the coronavirus continues to have on both the UK and the worldwide economy, we can expect further significant downgrades. Inflation is set to increase from 1.4% in the current tax year up to 1.8% in the tax year ended 2022.
It is also worth noting that the UK government will borrow an additional £14.6 billion in the current tax year which is the equivalent of 2.1% of GDP. Spending commitments will see total borrowings of £96.6 billion by the end of the tax year 2023/24. Interestingly, forecasts suggest that debt as a percentage of GDP will still fall by the end of the current Parliament.
In reality there was little in the way of shock or change to the UK property market, which will please many investors. The main surprise was the 2% stamp duty levy on foreign property investors which may well have been the reason why Boris Johnson dropped talk of a mansion tax. Economic growth was downgraded in the budget and we can expect further falls in light of the ongoing coronavirus issue.
In a time when stock markets around the world are collapsing, property prices have so far held relatively steady. How much longer can property markets continue to defy gravity?