Lonres the inter-agents data base has just produced its Q2 review which makes interesting reading. If you would like to know more please contact us.
A man walks into an estate agency and asks the agent to show him a large family house to rent for the next two years. “I want to move straight in with my family. What have you got?” A week later he rented a house for £25,000 a week, or £1.3m a year.
A few years ago, that might not have been the most sensible move, but it must now serve as a cautionary tale that higher taxes do not necessarily mean higher receipts. The referendum to leave the EU no doubt acted as a catalyst for uncertainty, but political soundbites and posturing do not make for a coherent economic plan, and stamp duty (SDLT) tinkering with additional taxes on second homes will see the slowdown in house sales transfer out of London into the rest of the UK. Indeed, revenue forecasts since the introduction of Land and Building Transaction Tax (LBTT) in Scotland in April 2015 are such that transaction volumes have fallen and the “middle” market may be subject to review. Revenue forecasts in the first year were some £33m short of government estimates and the second year about £82m behind forecasts.
Turning back to that £25,000 a week rental, the SDLT payable on that house as a second home would have been in the region of £5,150,000. Couple this with the political shenanigans that add to the difficulty in selling a house in this market and you can quickly see why revenue receipts are declining in London as uncertainty prevails. The tax is such a burden that it makes sense to either rent or not move home at all. In 2014, before this latest revision, SDLT payable on this property would have been £2,310,000, still a sizeable amount but nothing compared to this latest tax grab.
Elsewhere in this issue is fascinating analysis by Marcus Dixon on the real elephant in the room; what happens to the cost of a mortgage when interest rates go up, and a comparison with market conditions in the recession of 1989–1993. A low interest rate on a capital repayment mortgage then was 8.5%. In a recent briefing note by Barclays Equity Research, their view is that the impact of the rate rise is “overblown.” For people who have been working in the industry for the last 17 years there is a sense of uncertainty (that word again), prevailing in a market where there has been a bull run. For buyers, there is no return to the 10% per annum capital appreciation that could be expected. For sellers, the asking prices of 2014 have gone. The market is adjusting as it always does, but HM Treasury will bear some of the pain this time as they forgot that the London residential market is part of the economy, not a cash cow needing to be milked. There are better ways to deflate a bubble than this.
In Brexit news it is true that Brussels is looking at moving as much business away from the UK as it can, especially from the City of London. The Financial Times reported that a study by the European Central Bank (ECB) has now concluded that it would involve exorbitant cost to the EU because they would need to lay, build, and install their own network of undersea fibre optic cables. The UK was far-sighted enough to lay these in the 1980s. London now accounts for 43% of foreign transactions involving the euro. There are some 8,000 miles of cable emerging from the seas. London’s strategic position is such that the industry’s biggest data centre operators are increasing capacity to cope with rising demand, especially from Asia and the US.
Lastly, here at LonRes we have taken steps to connect agents in the capital with those based in rural locations. With city-and-country transactions on the rise, ResCountry is our latest new service enabling subscribers in both markets to harness these all-important opportunities. Hear more about the current dynamics between London and the country towards the rear of this issue.