Property pitfalls
Feature The housing market
Property pitfalls 32 | Money Management | May | 2017
The housing market Feature
A housing slowdown means a new set of circumstances for advisers to consider. Kuba Shand-Baptiste reports
A
fter years of rapid growth, particularly in the south-east of England (see Chart 1), the housing market has started to cool off. An average price rise of 3.8 per cent in the year to March 2017 is a semi-respectable figure, but the headline data from Halifax does not tell the whole story. The figure is less than half the rate of growth seen in the previous year. Add to that a series of clampdowns on the buy-to-let market, the shadow of Brexit uncertainty, and the prospect of a trickier period for the economy in general, and the outlook is less positive than it has been for some time. Much has been written about the difficulty of getting onto the housing ladder in the first place, and although this is unlikely to be a problem for most advisers’ clients, the consequences of confronting this situation will also continue to reverberate across the housing market as a whole. The housing white paper released in January recognised that changes must be made, and some alterations are already having an impact. The slowdown in buy-to-let lending seen in recent months (see page 19) is a result of the government attempting to tilt the market more forcefully in favour of firsttime buyers. Trading places One of the problems identified by the white paper was the lack of incentives for housebuilders to produce more properties. This, combined with unaffordable prices, tighter
mortgage lending rules and a rapidly ageing population, has seen moving activity stall and, in some cases, go into reverse. According to the Council of Mortgage Lenders (CML), there was a near-30 per cent drop in loans for house purchase among home movers between December and January. For advisers, of most relevance may be the impact that last year’s stamp duty rise has had on those looking to add to their portfolios. Introduced in April 2016, the 3 per cent duty on additional residential property purchases was another measure aimed at aiding first-time buyers. It means that for an average freehold residential house purchased in November 2016 in London, stamp duty now amounts to almost £14,000. Sarah Drakard, financial adviser and mortgage broker at London, Kent and Hertfordshirebased Evolution for Women, says aspirational home movers, with a wish to retain their first property once they have moved, are changing plans as a result. “I’m getting a lot of enquiries from people that have got their first flat, for example, and maybe realise that they’d like to buy a house. “Eventually, they realise that it’s now a lot harder to keep both properties, so I think the majority have decided not to.” The increased costs involved in switching could also have an impact on the wider market, particularly at a time when slowing price growth may already be encouraging some to stay put. Mike Richards, director and mortgage adviser at London-based Mortgage Money Management | May | 2017 | 33
Feature The housing market Concepts Associates, believes the aforementioned tax rules will lead to more and more residential homeowners abandoning their plans to move. Mr Richards says: “I think we may go back to ‘don’t move, but improve’ your house again.” Highlighting the importance of mobility in the overall housing market, Mohammad Jamei, senior economist at CML, says: “There are a few issues
affecting [home movers], and one of them is transaction fees. Stamp duty is a big upfront fee that homemovers and first-time buyers have to pay. In a lot of cases, if you’re wanting to trade up to a slightly bigger property, transaction fees like stamp duty don’t make it worthwhile. “So then you end up building an extension or making home improvements instead. And that really causes some friction in the
Chart 1: House price growth since 2009 85 80 75 70 65
32%
60 55 50
UK
45 40 35 30 25 20 15 10
34 | Money Management | May | 2017
Glasgow
Newcastle
Sheffield
Liverpool
Edinburgh
Aberdeen
Leeds
Source: Hometrack UK City House Price Index. Copyright: Money Management.
Belfast
Manchester
Nottingham
Birmingham
Cardiff
Leicester
Portsmouth
Bournemouth
Bristol
Southampton
Oxford
London
0
Cambridge
5
You end up building an extension or making home improvements instead. And that really causes some friction in the market
market, especially when it comes to labour mobility”. Mr Jamei says the government should look again at this part of the market, suggesting that greasing the wheels will be of assistance to all parties. Table 1 shows the role that home movers have played in the mortgage market over the past decade. “Home movers have received next to no help from the government. This part of the market, especially over the last three years, hasn’t moved in activity levels at all, whereas you’ve seen first-time buyers recover quite strongly. “I think if there’s any part of the market that requires some attention, it’s home movers and trying to help them make the next step up to free up housing.” Bank of Mum and Dad While ultra-low mortgage rates, slowing price growth and government initiatives such as the Lifetime Isa have given a helping hand to first-time buyers, buying patterns in this section of the market remain intact. Research from the Social Mobility Commission shows that 34 per cent of first-time buyers – up from 20 per cent in 2010 – are heavily reliant on financial help from family members when trying to purchase a home. And for those who do have backing, a lack of supply is still proving to be an issue in areas outside of London. Daniel Bailey, mortgage broker at Derbyshire-based Middleton Finance, says: “I’ve got a lot of frustrated first-time buyers at the moment. Clients have mortgages agreed, but because there’s such a lack of property on the market, they’re putting in offers and just not being successful.” Ray Boulger, senior technical manager at John Charcol, suggests that the government may have missed a trick where potential new-build property owners are concerned. “In the long term, the government doesn’t want to be in the mortgage market,
The housing market Feature but it wants to encourage housebuilding and the majority of lenders have a lower maximum LTV [loan-to-value] for new build properties than they do for other properties. “The reason for lenders’ reluctance to do 95 per cent on new builds is because they’ve been caught out in the past. So things are beginning to improve, but the availability of mortgages for people with a 5 per cent deposit on new build is still much more limited than it really needs to be if you take out the Help to Buy equity share scheme.” Lower mortgage rates have also given further impetus to the equity release market. According to the Equity Release Council’s spring report, the sector saw growth “surpass the £2bn mark for the first time with more than 27,500 new plans agreed” in 2016 – the highest level in over a decade. The first quarter of 2017 saw another acceleration of growth helped by the fact that many may be releasing equity to fund long-term care or their children’s attempts to purchase a property. An easing off of house price growth is unlikely to derail this trend. “[Equity release rates are] never going to be as cheap as mortgages, but they’re coming down to a more affordable figure. It’s less scary because at 7 per cent your debt will double every 10 years. At 4 per cent, it’s a lot lower compound interest,” says Nick Green, mortgage broker at Coventry-based Alternative Estates and Financial Services. BTL concerns For now, though, forecasts suggest a gradual cooling of the market rather than outright price falls. That should not be too difficult to endure even for clients whose wealth is tied up in property. But some sectors will fare better than others, and there appears to be more pain on the horizon for buy-to-let. Changes to mortgage tax relief are being phased in
£14,000 85%
2020
IN NUMBERS
£14,000 – average stamp duty on a second London property 2020 – date by which landlord mortgage tax relief will end 85% – average house price rise in London since 2009
between April 2017 and April 2020, by which point landlords will no longer be able to claim any relief on their mortgage interest payments. A number of landlords may find themselves pushed into a higher tax band because of the new calculations. This has lead to some investing their properties in a limited company structure, as these, as well as non-UK resident companies and landlords of furnished holiday lettings, remain exempt from the new rules. Mr Green highlights the fact that in response to the new tax rules, others are simply seeking to “sell off [properties] because the payments are too high”. He adds: “They’re not covering the rent, so that’s where they’re being hit. More people are cashing in on the high values now, rather than affordability, so if they can swap on to another deal then they’re happy. If they can’t swap on to another deal, that’s probably why they’re selling up”. Dale Anderson, project manager at London-based Experience Invest, believes news of recent tax alterations for the housing market may have gone over the heads of a number of residential property owners. Citing an Experience
Invest survey on the landlord tax changes, he says: “[In the survey] 85 per cent of British adults were unaware of the tax changes, so it has not been very well publicised as such, and we felt [the government] could have done a bit more. “People still see property investment as a number one safe haven compared to stocks and shares. So people need to be aware of the changes, as it may put a lot of people who are currently in the lower tax bracket into the higher rate tax bracket.” The British perception of property referred to by Mr Anderson is another reason to take a slowdown in overall house price growth seriously. The returns of recent years may have once again fooled clients into believing the only way is up. A corrective to this mindset would prove useful, but in the meantime a review of assets looks sensible. “We feel people should become better informed on regulations and tax laws so they can make a decision on what to buy and where to buy,” he explains.
To read more
Go to ftadviser.com/mm
Table 1: New mortgages by loan type, 2006-2016 House purchase
Remortgage
Year
First-time buyers
Homemovers
Buy-to-let
Homeowners
Buy-to-let
2006
402,800
711,900
–
1,144,200
–
2007
359,700
653,600
–
1,056,400
–
2008
192,100
320,600
–
865,500
–
2009
196,700
315,100
–
408,700
–
2010
199,400
339,900
–
316,400
–
2011
193,600
315,800
–
374,600
–
2012
217,800
326,400
–
316,800
–
2013
269,700
338,000
83,100
323,300
76,200
2014
309,400
363,600
100,400
300,400
96,000
2015
309,800
364,100
117,500
335,000
132,400
2016
337,700
359,400
102,100
384,200
153,100
Source: Council of Mortgage Lenders. Copyright: Money Management.
Money Management | May | 2017 | 35
Property pitfalls 32 | Money Management | May | 2017
The housing market Feature
A housing slowdown means a new set of circumstances for advisers to consider. Kuba Shand-Baptiste reports
A
fter years of rapid growth, particularly in the south-east of England (see Chart 1), the housing market has started to cool off. An average price rise of 3.8 per cent in the year to March 2017 is a semi-respectable figure, but the headline data from Halifax does not tell the whole story. The figure is less than half the rate of growth seen in the previous year. Add to that a series of clampdowns on the buy-to-let market, the shadow of Brexit uncertainty, and the prospect of a trickier period for the economy in general, and the outlook is less positive than it has been for some time. Much has been written about the difficulty of getting onto the housing ladder in the first place, and although this is unlikely to be a problem for most advisers’ clients, the consequences of confronting this situation will also continue to reverberate across the housing market as a whole. The housing white paper released in January recognised that changes must be made, and some alterations are already having an impact. The slowdown in buy-to-let lending seen in recent months (see page 19) is a result of the government attempting to tilt the market more forcefully in favour of firsttime buyers. Trading places One of the problems identified by the white paper was the lack of incentives for housebuilders to produce more properties. This, combined with unaffordable prices, tighter
mortgage lending rules and a rapidly ageing population, has seen moving activity stall and, in some cases, go into reverse. According to the Council of Mortgage Lenders (CML), there was a near-30 per cent drop in loans for house purchase among home movers between December and January. For advisers, of most relevance may be the impact that last year’s stamp duty rise has had on those looking to add to their portfolios. Introduced in April 2016, the 3 per cent duty on additional residential property purchases was another measure aimed at aiding first-time buyers. It means that for an average freehold residential house purchased in November 2016 in London, stamp duty now amounts to almost £14,000. Sarah Drakard, financial adviser and mortgage broker at London, Kent and Hertfordshirebased Evolution for Women, says aspirational home movers, with a wish to retain their first property once they have moved, are changing plans as a result. “I’m getting a lot of enquiries from people that have got their first flat, for example, and maybe realise that they’d like to buy a house. “Eventually, they realise that it’s now a lot harder to keep both properties, so I think the majority have decided not to.” The increased costs involved in switching could also have an impact on the wider market, particularly at a time when slowing price growth may already be encouraging some to stay put. Mike Richards, director and mortgage adviser at London-based Mortgage Money Management | May | 2017 | 33
Feature The housing market Concepts Associates, believes the aforementioned tax rules will lead to more and more residential homeowners abandoning their plans to move. Mr Richards says: “I think we may go back to ‘don’t move, but improve’ your house again.” Highlighting the importance of mobility in the overall housing market, Mohammad Jamei, senior economist at CML, says: “There are a few issues
affecting [home movers], and one of them is transaction fees. Stamp duty is a big upfront fee that homemovers and first-time buyers have to pay. In a lot of cases, if you’re wanting to trade up to a slightly bigger property, transaction fees like stamp duty don’t make it worthwhile. “So then you end up building an extension or making home improvements instead. And that really causes some friction in the
Chart 1: House price growth since 2009 85 80 75 70 65
32%
60 55 50
UK
45 40 35 30 25 20 15 10
34 | Money Management | May | 2017
Glasgow
Newcastle
Sheffield
Liverpool
Edinburgh
Aberdeen
Leeds
Source: Hometrack UK City House Price Index. Copyright: Money Management.
Belfast
Manchester
Nottingham
Birmingham
Cardiff
Leicester
Portsmouth
Bournemouth
Bristol
Southampton
Oxford
London
0
Cambridge
5
You end up building an extension or making home improvements instead. And that really causes some friction in the market
market, especially when it comes to labour mobility”. Mr Jamei says the government should look again at this part of the market, suggesting that greasing the wheels will be of assistance to all parties. Table 1 shows the role that home movers have played in the mortgage market over the past decade. “Home movers have received next to no help from the government. This part of the market, especially over the last three years, hasn’t moved in activity levels at all, whereas you’ve seen first-time buyers recover quite strongly. “I think if there’s any part of the market that requires some attention, it’s home movers and trying to help them make the next step up to free up housing.” Bank of Mum and Dad While ultra-low mortgage rates, slowing price growth and government initiatives such as the Lifetime Isa have given a helping hand to first-time buyers, buying patterns in this section of the market remain intact. Research from the Social Mobility Commission shows that 34 per cent of first-time buyers – up from 20 per cent in 2010 – are heavily reliant on financial help from family members when trying to purchase a home. And for those who do have backing, a lack of supply is still proving to be an issue in areas outside of London. Daniel Bailey, mortgage broker at Derbyshire-based Middleton Finance, says: “I’ve got a lot of frustrated first-time buyers at the moment. Clients have mortgages agreed, but because there’s such a lack of property on the market, they’re putting in offers and just not being successful.” Ray Boulger, senior technical manager at John Charcol, suggests that the government may have missed a trick where potential new-build property owners are concerned. “In the long term, the government doesn’t want to be in the mortgage market,
The housing market Feature but it wants to encourage housebuilding and the majority of lenders have a lower maximum LTV [loan-to-value] for new build properties than they do for other properties. “The reason for lenders’ reluctance to do 95 per cent on new builds is because they’ve been caught out in the past. So things are beginning to improve, but the availability of mortgages for people with a 5 per cent deposit on new build is still much more limited than it really needs to be if you take out the Help to Buy equity share scheme.” Lower mortgage rates have also given further impetus to the equity release market. According to the Equity Release Council’s spring report, the sector saw growth “surpass the £2bn mark for the first time with more than 27,500 new plans agreed” in 2016 – the highest level in over a decade. The first quarter of 2017 saw another acceleration of growth helped by the fact that many may be releasing equity to fund long-term care or their children’s attempts to purchase a property. An easing off of house price growth is unlikely to derail this trend. “[Equity release rates are] never going to be as cheap as mortgages, but they’re coming down to a more affordable figure. It’s less scary because at 7 per cent your debt will double every 10 years. At 4 per cent, it’s a lot lower compound interest,” says Nick Green, mortgage broker at Coventry-based Alternative Estates and Financial Services. BTL concerns For now, though, forecasts suggest a gradual cooling of the market rather than outright price falls. That should not be too difficult to endure even for clients whose wealth is tied up in property. But some sectors will fare better than others, and there appears to be more pain on the horizon for buy-to-let. Changes to mortgage tax relief are being phased in
£14,000 85%
2020
IN NUMBERS
£14,000 – average stamp duty on a second London property 2020 – date by which landlord mortgage tax relief will end 85% – average house price rise in London since 2009
between April 2017 and April 2020, by which point landlords will no longer be able to claim any relief on their mortgage interest payments. A number of landlords may find themselves pushed into a higher tax band because of the new calculations. This has lead to some investing their properties in a limited company structure, as these, as well as non-UK resident companies and landlords of furnished holiday lettings, remain exempt from the new rules. Mr Green highlights the fact that in response to the new tax rules, others are simply seeking to “sell off [properties] because the payments are too high”. He adds: “They’re not covering the rent, so that’s where they’re being hit. More people are cashing in on the high values now, rather than affordability, so if they can swap on to another deal then they’re happy. If they can’t swap on to another deal, that’s probably why they’re selling up”. Dale Anderson, project manager at London-based Experience Invest, believes news of recent tax alterations for the housing market may have gone over the heads of a number of residential property owners. Citing an Experience
Invest survey on the landlord tax changes, he says: “[In the survey] 85 per cent of British adults were unaware of the tax changes, so it has not been very well publicised as such, and we felt [the government] could have done a bit more. “People still see property investment as a number one safe haven compared to stocks and shares. So people need to be aware of the changes, as it may put a lot of people who are currently in the lower tax bracket into the higher rate tax bracket.” The British perception of property referred to by Mr Anderson is another reason to take a slowdown in overall house price growth seriously. The returns of recent years may have once again fooled clients into believing the only way is up. A corrective to this mindset would prove useful, but in the meantime a review of assets looks sensible. “We feel people should become better informed on regulations and tax laws so they can make a decision on what to buy and where to buy,” he explains.
To read more
Go to ftadviser.com/mm
Table 1: New mortgages by loan type, 2006-2016 House purchase
Remortgage
Year
First-time buyers
Homemovers
Buy-to-let
Homeowners
Buy-to-let
2006
402,800
711,900
–
1,144,200
–
2007
359,700
653,600
–
1,056,400
–
2008
192,100
320,600
–
865,500
–
2009
196,700
315,100
–
408,700
–
2010
199,400
339,900
–
316,400
–
2011
193,600
315,800
–
374,600
–
2012
217,800
326,400
–
316,800
–
2013
269,700
338,000
83,100
323,300
76,200
2014
309,400
363,600
100,400
300,400
96,000
2015
309,800
364,100
117,500
335,000
132,400
2016
337,700
359,400
102,100
384,200
153,100
Source: Council of Mortgage Lenders. Copyright: Money Management.
Money Management | May | 2017 | 35
