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The 3% Stamp Duty surcharge – one year later

by: John Goodall, CEo and founder of Landbay
  • 03/04/2017
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The 3% Stamp Duty surcharge – one year later
This week marks a year since the government introduced its Stamp Duty surcharge of 3% on second homes – one of the many measures touted as part of a wider mission to solve the housing crisis.

Those involved in agreeing the tax hike were under the opinion that the burgeoning popularity of buy to let as an investment was having an adverse effect on the millions of aspiring homeowners across the country, driving up rents, decreasing affordability and in many cases leading to poor tenancy conditions.

The clampdown had a major initial effect on the market, as buyers rushed to complete before the introduction date on 1st April, creating a stampede in demand and sending house prices through the roof.

The Office for National Statistics (ONS) said house prices were up 7.6% from the year previous to February 2016, while separate figures from The Council of Mortgage Lenders showed the amount of money borrowed for home loans was the highest for nearly nine years in the run up to the 1st April.

 

Did it work?

One year on, it is unclear whether hiking Stamp Duty has had the desired effect.

An additional 3% may have been enough to deter some ‘dinner party landlords’ with just one or two properties, but it was a small price to pay for professional, seasoned landlords. While many may enter the market as an opportunity to invest and capitalise on recent price rises, professional landlords are more focused on simply maintaining their current portfolios and benefiting from long term yield rather than short term gain.

So, while it may have provided extra lining to the Exchequer’s pockets, it made little difference to most professional landlords and their long-term strategy. In fact, with less competition and fewer entrants to market, tenants are at the mercy of their landlord more than ever, particularly in areas with short supply, such as London.

 

Unintended consequences

Furthermore, any reduction in demand, or rumours that there would be, is enough to ricochet into the development space, delaying or scrapping the construction of rental properties.

Rebalancing investment into buy to let with home ownership is what the government wanted, yes – but what wasn’t on the table was the intent to even further reduce the number of properties available for tenants who need to or want to rent.

It may be too early to fully ascertain whether the Stamp Duty surcharge achieved the chancellor’s desired outcome because the sector is still finding its new normal.

Over the last few years the government has been pulling all manner of tax and regulatory levers in an attempt to improve standards for renters. However, by introducing the 3% surcharge on stamp duty for second properties, it is undeniable that the government created a chronic lack of supply across both sales and lettings. These unintended consequences need to be faced head on.

 

Attitude change

What we saw in the Housing White Paper was a clear change in attitude, as the importance of the private rented sector in the wider housing mix was recognised.

Buy-to-let needs to be supported, not discouraged as a way of tackling the housing crisis.

The overarching manifesto to improve standards for the 4.3m people currently renting shone through, which is more likely to be achieved by positive initiatives to professionalise the sector rather than further playing the blame game.

Encouraging institutional investment in large scale developments specifically designed to rent rather than buy, will help to control rental growth while also improving living standards for those relying on a well-served market.

While private rented sector schemes are already on the way in many of the areas facing the fastest pace of rental growth, what we now need is clear commitment of exactly where in the country attention will be prioritised.

For those in the top 20 areas, experiencing rental growth above 3% a year, the clock is ticking.

 

Promote construction

While the changes have been successful in rebalancing the housing sector to improve home ownership, we would welcome any further changes to accommodate construction that will add to housing stock and allow the buy-to-let sector to remain a strong asset class in which the investor, the broker and the lender can live on.

An exemption of the surcharge for these developers would be a definite sign of the government’s commitment to overstretched housebuilders and fully demonstrate their new-found support of the system.

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