This summer is shaping up to be one of the best times for Britons to buy a home because property price growth is significantly slowing down.
Combining the fact that Britain voted to leave the European Union, which has created massive uncertainty over how the country is going to fare politically and economically, as well as changes to Stamp Duty tax rates in April this year, and the perfect storm is brewing for dampened house prices.
This week, mortgage lender Halifax revealed that property prices across Britain only grew 1.2% in the last three months (April-June) to £216,823 ($280,991). While house prices are still growing, the April to June period should technically see a much sharper rise because this is the start of the peak home-buying season.
Martin Ellis, Halifax housing economist, said (emphasis ours):
“There is evidence that the underlying pace of house growth may be easing. House prices in the three months to June were 1.2% higher than in the previous quarter; down from 1.5% in May. The annual rate of growth fell from 9.2% in May to 8.4%; the lowest since July 2015. House prices continue to increase, albeit at a slower rate, but this precedes the EU referendum result, therefore it is far too early to determine any impact since.”
What Ellis from Halifax says is true — it is too early to determine the absolute effect of what Brexit will do to property prices. However, that uncertainty has also put a dampener on prices because it is causing more Brits to put homebuying on pause, in case they need that cash in the event of an economic downturn, and foreign investors are holding off on hoovering up investment buys until they know what is really going on.
Property funds can provide an early litmus test of how great or how terrible investors are feeling right now. And in the institutional markets — professional traders rather than someone on the street buying a place to live — seven investment firms suspended trading in their property funds this week, freezing £15 billion ($19.4 billion) of assets since Monday, because they are worried about how the housing market in Britain is going to go post-Brexit.
Basically, investors wanted to pull out cash from the funds because of predictions that prices are going to effectively tank and they don’t want to be burned. In turn, the property funds stopped them from doing this because otherwise they would be screwed as fund managers cannot liquidate, or sell-off, their underlying property assets fast enough to meet the demand for cash from fleeing investors.
Meanwhile, the Stamp Duty tax change in April this year has already helped contribute to fewer people buying properties and therefore putting a dampener on prices.
Stamp duty is a tax placed on buyers when they purchase a property in the UK. It is payable on completion of the property and under the new system, introduced in April, works out at an extra £93,750 if you’re buying a property at £1.5 million, according to the government’s stamp duty tax calculator. However, if you’re buying a property for £5 million, you’ll be forking out £513,750 just in stamp duty fees.
If you own more than one property, a 3% stamp duty is applied. This new fee also came into force in April and is applicable to buy-to-let investors and those who are buying a second home. This 3% fee is on top of the extra cost of a new purchase in April.
Halifax said this move has already killed off price growth, no matter how imbalanced the supply and demand equation is:
“Home sales stabilised in May. The introduction of higher stamp duty tax rates for buy to let and a second home in April has had a substantial impact on house sales in recent months. A rush to complete sales ahead of the tax change caused a sharp rise in March, which was followed by a substantial decline in April.
The stamp duty change has also affected mortgage approvals in recent months. The volume of mortgage approvals for house purchases – a leading indicator of completed house sales – increased by 1.3% between April and May. Nonetheless, approvals in the three months to May were 6% lower than in the preceding three months.”
All-in-all property price growth across Britain is going to be pretty cool this summer. And while it is bad news for investors looking for returns, it is great news for people looking to get on the property ladder.