Housing Market Update – January 2021

There are several factors that are going to affect the property market. I think we need to look back and see what's happened in 2020 to understand what might happen in 2021. So leading up to 2020 for the last 10 years, from 2010 we've had 10 years of steady growth. Most properties around the country have doubled in value. If you go back to 2005 we saw a really big boom particularly in cheaper areas, Up North and in Northern Ireland. And those areas boomed massively fueled by the introduction of buy-to-let mortgages. And people probably paid more than they should for properties. So when the crash came, those areas crashed the most and they haven't really recovered as much of the rest of the country has.

Most of the country, if you look at buying a property in 2010, in most places that property has certainly gone up in value, in many places it's doubled over the last 10 years. Now into 2020, when prices were quite high already, we got hit by the Corona Virus Pandemic. The UK pretty much shut down when the lockdown happened in March, 2020. And for about 10 or 12 weeks nothing happened in the UK property market. that was during a time that's normally a boom, which is springtime, there's normally a boom in the property market, which didn't happen. So when suddenly the market opened up, I think there was a real feeling of relief and everyone seemed to go mad. We were coming into the summer, there's normally a summer boom as well. So there was a huge amount of rent up demand in the UK property market from about July, 2020.

There were also lots of transactions which had literally halted for the best part of three months. I had one purchase and three remortgages going through and nothing happened for them. So all that activity suddenly caught up. This means that mortgage brokers, solicitors, and estate agents were all very, very busy. The market seemed to go crazy. There was lots of money floating around from Bounce Back Loans and CIBIL loans which probably shouldn't have been used for property, but I guarantee a lot of it probably was used for deposits. And I think there were also people who had money in the bank, who felt look, this pandemic, this recession is pretty bad. They remember what happened to the last recession, and they thought maybe money isn't best left in the bank. Maybe we should put into assets like real estate. So people bought property, people were buying cash, people were buying things at the end of 2020 for way more than they were worth. I live in a flat, the people below me decided to sell their property. They put it on the market, it went within two days, it went from more than they were asking. And that was a real symptom that we saw happening in the property markets towards the end of 2020.

Now, I want you to understand this, whenever property prices boom you always have a burst afterwards. Actually if you go back and watch some of the housing updates I've done towards the end of 2020, I was saying, look the property market cannot sustain this growth. At some point, it's going to have to crash, it's going to have to come down. And I was really surprised to see that didn't happen. Now, what was going to cause that crash I believed, was at the end of October when the government's furlough scheme was coming to an end. There were millions and millions of people on furlough who I expected unfortunately may not be brought back to work, they'd probably be made unemployed. That would have had a catastrophic effect on the economy and the sentiment of the country, and that's why the government have extended the furlough into 2021, initially to March, now to April. So this has I think prolonged the inevitable. I think at some point we're going to see people lose their jobs. The recession's going to get worse. That's going to have a knock on effect on commercial property. It's going to have a knock on effect to people who cannot afford to hold their homes anymore and have to then sell them.

There's going to be more supply in the market than there is demand, and we're going to see property prices come down. Last year in about may June time The Bank of England was saying, they felt the property prices in the UK would be affected by about 16%, a 16% down term because of the effect of COVID-19 and the recession. Now that didn't happen. And I think that's why the government intervened And they've extended furlough they all support in the stamp duty holiday. So let me talk a little bit about that, because that's really important. We're looking at what's going to happen to property prices in 2021. So the government announced that they were going to give everyone a stamp duty holiday. Now stamp duty is the tax you pay when you buy a property. The amount you pay varies, it's based on the value of the property. And as investors, we pay an extra 3%. So they said anyone who's buying a first home or if you're selling a home to buy another property on purchases up to 500,000 pounds there was no stamp duty. Now as investors, we still pay the extra 3%, but it's still less than we would pay normally.

This did the trick that the government wanted. It really stimulated the market. And there was a rush for a lot of people to come and buy properties because they wouldn't have to pay stamp duty. Now this was supposed to be until the end of March, 2021. Now anytime there's a change like this, when the government first suggested that they were going to bring a few years ago, they said, right, anyone who's an investor is going to have to pay an extra 3% stamp duty, they gave everyone notice. There was a real flood of purchases that went through and everyone was rushing to get it done before the cutoff point, so that they didn't have to pay the extra 3% stamp duty. So that caused a real boom to the market. And a similar thing has happened now. So the government wanted to protect the UK property market because the UK economy is based mainly on retail but also the property sector. And they knew if the property sector was hit as well as the retail, which had been hit by the pandemic then the country was really going to be in difficulty. And that's why they introduced the stamp duty holiday to stimulate the market, to make sure that they propped it up so that market kept on going, and it certainly did the trick. But the question is, what's going to happen at the end of March, 2021 where the stamp duty holiday is supposed to end? Now there's a couple of things, it might just end or the government might realise that maybe they need to extend this further in the same way they extended furlough just to keep the property market propped up. Now, no one knows what they're going to do. I'm sure there's going to be an announcement about it at some point, but until that happens we don't quite know.

So if you want to buy a property in the UK at the moment, when you find a property today, it's probably going to take at least two if not three months for that sale to go through for a couple of reasons. First of all, as I said, everyone is very, very busy. Solicitors are busy, mortgage brokers are busy, is taking a long time for lenders to process mortgage applications. And I think they're a little bit nervous about the market as well. So they're not rushing out to lend lots of money. They do want to lend money but they're being very cautious about it. So even if you found a property in January it's very unlikely that that transaction is going to go through before the end of March. Unless you're buying cash, well, maybe you could do it, but if you're getting a mortgage, which most people do, and you're starting to find a property right now it looks like you're probably going to have to pay the normal stamp duty unless the stamp duty holiday is extended.

So what does that actually mean for you? And what does it mean for the property market? Well, if you think about it, the idea of not paying stamp duty encourages people to come and buy their property. But if they realise, well, actually that's not going to happen now, I haven't got enough time, suddenly that demand falls away. So I expect that we're going to see property prices certainly start to slow and maybe even drop over the next few months. When it comes to April there's no incentive at all. I mean, obviously then anyone who's already found a property in them, going through the transaction they will hopefully get those done before the end of March. When it comes to April that incentive is no longer here, unless the government do decide to extend it which they might decide to do, I think sales are going to drop off a cliff in April. Now, add to this. Also, that the fact that we're in this third national lockdown in England at the moment, no one knows how long this is going to last.

Now like the second lockdown the property market is still open. There are restrictions but you can still go and look up properties, you can still tenant properties, these kinds of things. As long as you're observing social distancing and being very careful. Now, things are changing on a daily basis. The first lockdown everything shut. And because of this new, more virulent version of the COVID-19 virus, and there's a chance that there might be tighter and tighter restrictions. And so it might be difficult to actually go and view property. Now, having said that, I've actually purchased property in the past that I've never actually been to and I've never personally seen the property, I've never even met the owner. I have had someone else in the local area go and look at the property for me, takes some pictures, do what they need to do, and then I've done the deal over the phone. So I absolutely know it is possible to buy property remotely as long as you have someone else who could go and look around the property for you.

What's become a real boom in the UK property market industry is these virtual tours. So we have lots of companies now who will now do virtual tours of property. They have these 360 degree cameras that can take really good images and you can actually walk through a property. It's a very clever technology. And what this means is you actually view a property without physically attending. Now, if you are going to buy a property I think it's always sensible that you or someone you know actually does view the property and check everything is as expected, but you could certainly do a lot of research and prep work online before you even have to step inside the property. So that's going to help the property market. But it really depends on what happens this lockdown.

My gut feeling is that the government will probably not extend the stamp duty holiday. My gut feeling is this lockdown is going to get worse, and as that happens I think we're going to see less and less demand for property. And if you think about macro economics you've got less demand, you still got lots of supply, well, I think prices are going to come down. So what's going to stimulate the supply. Well, as I've mentioned in these blogs previously at the end of January is the time where everyone does their self-assessment tax return. Anyone who's a landlord they should be submitting their tax return for the previous tax year. So what that means at the end of January people put their tax return in, and that's the point where they pay their tax as well.

Now this January, January, 2021 is the third year where we're seeing the effect of the introduction of section 24. Section 24, were the tax changes that were introduced back in April, 2017. And basically it's a change to the way that we as property investors are taxed. What this means is that if you own property in your own name, which was the way that most people did it, given it was the most tax efficient way. And if you are a higher rate payer which many landlords are, because they have a job and they have income from property. And if you have mortgages, which again, most investors have it means you're going to pay more tax, so let me say that again. If you own property in your own name, and you're a higher rate taxpayer with mortgages you're going to pay a lot more tax on your property income. This January, January 21, is where we're seeing the third year of that in effect.

Now the government have decided to phase this in over four years. The first year we saw 25%, that was in 2019. In 2020 January we saw 50% of this tax change. In January, 2021, we're going to see 75%. And when we get to next January, January 2022, we're going to see the full 100% effect of section 24. So let's say you've got a landlord who might be earning I don't know, 100,000 pounds after tax from all of their property. They've got a good portfolio. Their job is managing that portfolio full-time, that's what they do for a living. Because of section 24, if they're a higher rate taxpayer, and they own the properties in their own name, and they've got mortgages that 100,000 pound profit after tax might come down to maybe something like 65 or 70,000 pounds after tax. That's still a pretty good income, right? But they're having a massive reduction in the amount of money that were making.