What Effect Has the Stamp Duty Overhaul Had on Homebuilding in the UK?

By: Lucent Group   11/30/2015
Keywords: Alternative Investments, real asset funds

Lowering the “slab stamp tax” was readily welcomed in all quarters – especially young buyers, homebuilders and investors. New building is expected to follow.

Chancellor George Osborne cut the stamp duty on home sales in late 2014 and observers in the housing industry almost unanimously agree it is having a significant impact on residential markets. If it favours any particular group it is most likely younger people making their first home purchase. The lower the price of the home, the lower the tax will be.

And in combination with the Help to Buy scheme, which has proven to be popular with first-time homebuyers, it might lead to more home building. The ripple effect is that everyone employed in home lending, transactions, building and development should benefit. Indeed, institutions and individuals who make in land might well be beneficiaries of the reduced stamp duty tax.

A short summary on how that works: greater demand for homes and access to financing among younger workers could drive up prices, and many suggest that is exactly what will happen. But homebuilders who work in lower-cost, smaller residences now have a market of qualified buyers. The bigger question is: will they build?

One hint they will is that the Home Builders Federation UK has campaigned to abolish the stamp duty slab system. They say it distorts the market, penalises buyers and influences builders to construct homes that price just below the different stamp tax duty thresholds. National house builder Crest Nicholson announced in December 2014 that the lowering of the tax gives it the confidence to resume a new phase of building 280 homes in Southampton in 2015. The company says that 44 per cent of buyers in the first phase of the development were making use of the Help to Buy scheme, which is directed at first-time buyers. The natural hunger for real assets – a home to own – remains undaunted.

Just look at the numbers on how much the downward adjustment in the stamp duty saves homebuyers. The typical £273,000 home purchase formerly required a £8,200 stamp duty; now it will be closer to £3,650. The duty has risen 300 per cent since 2004. For homebuyers in London, where prices are much higher than elsewhere, the tax average is about £15,000; in the North East of England the typical tax is £640.

Managers of – the money behind the developments – should take note. This is because the stamp duty reduction acts in much the same way of Help to Buy in that it lowers the bar of entry into home ownership. Real asset funds are typically applied to buy land and to establish council approval on use changes. With additional help to first time buyers, who are younger by nature, a good argument can be made that these developments infuse financial activity into a local economy. Those UK land investments are effectively an investment in a whole town.

For anyone drawn to land as an alternative investment, the important point to consider is simply that more transactions will be made at all price levels. Second-time buyers are more inclined to make that move up the property ladder, and those above them will do the same. Even homes priced north of £1 million, which will not see a lower tax, will still be purchased by those who can afford them because they will be able to sell their lower-priced current home.

But all investors should seek the advice of an independent financial advisor. They understand market forces as well as how to balance an individual’s wealth portfolio against relative risks.

Keywords: Alternative Investments, real asset funds

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