Going, going, gone – property auctions fall victim to BTL taxes

Going once, going twice… An often-heard chant up and down the country, when property auctions were booming and people were eager to snap up houses at bargain prices. Though not of late.

As the number of homes put up for sale at auctions has fallen, so has the number of lots bought, and in fact the number of auctions held. According to the Essential Information Group (EIS), which holds a comprehensive auction database, activity last year fell by about 10% on the previous year.

In November, 1.1% fewer residential properties were put up at auction than in the same month last year, while the number of lots sold was down 4.7%. In the whole of Q3, residential properties put up for sale were down 3.1%, while sales were down 6.8%.

What is to blame?

David Sandeman, managing director of EIG and author of the property auction report, pointed to what he called a “government-engineered stop to market activity”. In particular, the 3% Stamp Duty surcharge on second homes introduced last April and the looming cuts to landlord tax relief to be phased in this year.

“Auctions were traditionally used to trade property, but now because of the Stamp Duty it’s become too expensive, people can’t flip properties anymore. For anybody to make any money after tax there’s got to be a fairly big difference in buy and sell values and with the sluggish market people are not seeing the difference in value,” he explained.

“People think if they don’t buy now, next week there will be another property on the market just the same.”

The financing issue

Resulting from the shift to give home buyers a better deal than professional landlords, was a tightening of underwriting rules. From this year, lenders have had to abide by stricter affordability criteria when signing off mortgages, in order to account for the more punitive tax environment befalling buy-to-let landlords.

This slowed the lending process down and, naturally, presented an additional burden on fast-paced facilities such as auctions. But financing was not the main issue, said specialist lender LendInvest, which late last year launched an auction finance product to “solve the problem” of lenders not being able to complete loans in time.

About four out of five auction purchases in the residential market are made in cash, so lending issues do not influence the market too much, suggested chief commercial officer Matthew Tooth. Besides, there was always bridging.

Instead, for Tooth the biggest issue with auctions were price fluctuations caused by political developments such as Brexit. “If people think prices are falling they are reluctant to commit and they don’t chase. The reason fewer properties have sold at auction is because of price uncertainty,” he said.

No financing issue…until there is

“There is absolutely no issue with the financing options available, there is plenty of money out there,” said Bridging Finance Solutions managing director Steve Barber.

Barber said it was in the area of long-term planning where the tables had turned following the government’s tightening of the buy-to-let sector.

“The issue is with clients looking at a project from cradle to grave. Bridging loans underwrite people from the exit backwards. Buy-to-let lenders are tightening up so we have got to assess, can those client get out of the deal,” said Barber. This generally means a lower loan and higher deposits, he said.

If anything, Barber had observed a change in the type of clients enquiring about auction-related loans, he said. Instead of investors, business had been driven by first-time buyers, many backed by the pension capital of their grandparents.