The Stamp Duty Holiday will end on the 30th September, leaving unfulfilled property purchases missing out on the tax savings the holiday provided. Following the tapering-out of the holiday, the maximum saving is £2,500 on a £500,000 purchase price. £2,500 is a significant sum of money. But relative to a property purchase price of £½ million I can’t see many people backing out of a deal if they fail to make the saving by the end of September.

The ending of the Stamp Duty Holiday is therefore unlikely to lead directly to property prices falling. But that’s not the point. The holiday was meant to stimulate the housing market during the pandemic. Keeping people in employment would mitigate some furlough costs to the Government. It would also generate Income Tax, National Insurance and VAT, along with some Inheritance Tax, Capital Gains Tax and a smattering of Stamp Duty Land Tax. It achieved its objective. However, the stimulus was introduced at a time when we had historic low interest rates. There was a shortage of available properties for sale. And the pandemic changed the living and working relationship for many who had proven they could effectively work from home. This new work/home relationship is likely to last forever for some. These combined factors drove demand for property and prices shot through the roof due to competition between buyers.

The Stamp Duty Holiday was only one factor in the rise of property prices over the past 18 months…

The Stamp Duty Holiday will evaporate at the end of September, yet the market will still have a shortage of property. Mortgage interest rates are continuing to fall, becoming more attractive as lenders compete with each other.

The change in people’s work/life balance is, in my opinion, a major influence over demand in the property market today, and this shows no sign of abating. Within my own family there is need for a home office, the requirement not being necessary until the pandemic saw both husband and wife working from home for most of the week. For some, being able to work permanently from home via the Internet means there is no longer the need to live within commuting distance of the city centre. These ‘home-workers’ can relocate to suburban or even rural settings, the location currently only dependent upon available superfast broadband.

One of our clients is now moving to the coast, as she no longer needs her city office. She told me she’s happy to get the train into Leeds for the occasional meeting – which I suspect will also occasionally be with some of her colleagues in one of our city’s superb wine bars! Another client only yesterday said he’s going to rent his flat in the city, and buy a house in the suburbs as his company has given up the lease on their city offices and everyone is now working from home.

House building continues to remain behind the curve when measured against the population growth…

This has nearly always been the case, supply responding to demand. The housing supply is not going to match demand any time soon, if ever. Institutions are broadening their share of the residential letting market with some of their portfolio properties being new-build. The lead-time for land acquisition, obtaining planning permission, and the properties built will not be quick. And will these properties be in the prime locations where tenants want to live? Unlikely they will be within the Ring Road of Leeds due to the shortage of available site. Will the Council start to allow the erosion of the green spaces we have? I sincerely hope not!

So, the Stamp Duty Holiday will have disappeared by the end of the month, demand has not diminished, supply will not meet demand and we’re still seeing people needing more space to work from home/relocate, etc. What are we left with? Interest rates.

As we recover from the pandemic, inflation has surged in most countries. In the UK the Bank of England is expecting CPI inflation to hit 4% before the end of the year. This is twice the level in the Bank’s forecast earlier in the year. In the US, the Consumer Price Index has already reached 5.4%. This level of inflation would historically have initiated a rise in interest rates as a means of curbing this trend.  But we’ve not seen that, so far.

I was interested to read that the Bank of England has a new external rate setter, Catherine Mann…

She’s the former Chief Economist at Citi, the American multinational investment bank. Ms Mann commented in a recent video presentation that in her opinion inflation won’t be as much of a problem today as it was in the 1970’s. Back then companies used pricing power but market forces have now curtailed this. Wages are no longer closely linked to consumer inflation; there were macroeconomic factors in the ‘70’s that don’t exist today; and the central banks had not established their inflation-fighting credentials, which were introduced around 1998. With these differences Ms Mann is suggesting this sharp rise in inflation will prove ‘transitory’. She expects inflation to ease back to 2% next year.

Ms Mann’s dovish approach is substantiated by two facts. The first is that retail interest rates are continuing to be cut, especially amongst the lenders to the property market. Such rate cuts would be unlikely if lenders feared the BoE Base Rate was to rise imminently. The second is that a number of High Street banks are themselves entering the residential lettings market. This form of investment has never been of interest to the banks historically, as the yield has been too low and rental and management costs too volatile.

With residential net yields now down at around 4% why would major banks, like Lloyds, involve themselves in this market unless they believe that a 4% net yield will remain well above the bank base rate for some years to come. Not all economists have the same view, although with my experience of a number of ‘booms and busts’ over the years, I’m inclined to follow Ms Mann’s thinking.

If interest rates are to remain at record low levels for the next few years, property prices will continue to rise…

If you’re looking for a new home, don’t procrastinate. Your next property will only get more expensive the longer you wait. If you’re fortunate to have a decent sum of cash in the bank which is earning very little in interest, consider investing in property. With a well-located buy-to-let you should see 4+% net yield, plus capital growth. Buy-to-lets don’t need to be problematic. You just need a competent managing agent with a proven track record of generating returns for clients.

A Newsletter Editorial by Director Michael Moore FNAEA, MARLA.