Homeowners under the Hammer with PwC
Recording of my presentation at PwC in Leeds in April 2016, outlining my thoughts on the new stamp duty surcharge, effect of Brexit and how to view property investment now in the UK
Homeowners under the Hammer with PwC
Full transcript below:
Alex: The areas we’re going to cover is obviously as I see it on the new stamp duty rules, Brexit is obviously on the horizon 23rd June, we’ve all got that in our diaries I know. The outcome of any and indeed the current intervention, the property investment status now and where you should actually invest and what you should actually now look for and how to become as I call it a preferred purchaser. So very briefly who’s this rogue in front of you this morning, as Gordon very kindly said an ex-convict, used to work in London for these guys and Yorkshire and had the privilege of working through for these guys for the last sort of 13/14 years, I’ve now got my own business on the other side of the fence helping people buy and sell. So, moving straight into it as we’ve already heard, and we’ve discovered the new stamp duty rates look like this, as we’ve said the blue column is the new incremental system and the sort of gold bars is just the overall with the additional 3% surcharge added on. And this is very much a new approach that’s coming from the government. Some would argue that the government has sneaked this in over the Christmas period and what it means in actual genuine real terms is that if you’re now buying a property, a second, third, fourth property, 400,000 normally under stamp duty, you would have paid £10,000 that’s a 2.5% effective rate. Now with this surcharge it actually equates in real terms to £22,000 which is 5.5% so some big big numbers going in there. How I sort of perceive this as the result of this is that there was an absolute panicked buying frenzy from January really up until the deadline at the end of March. What we saw is that there was a price spike in some areas, it’s caused an imbalance and really my advice to a lot of investors at the time was to stop, wait and hold off. As a investor you should never go with the crowd and I hope none of you were with them and they bought into this sort of philosophy of getting and beat the deadline. But it’s obviously it’s early days but I personally see that you will start to see a price drop come off in some of these areas and of course that is now when you should buy. What happened on to the new stamp duty, so this new incremental system is really affected the top end of the market especially in London and we’ve now obviously got the 3% surcharge to contend with as well, so two fairly significant factors in that. The current intervention from the government obviously as we’re all aware we’ve got the 3% stamp duty surcharge. This is a brand-new direction from the government. From speaking with a lot of the legal guys that I know they’ve come in from the start and they’ve literally just closed all the doors, all the loopholes, it doesn’t matter if you are a married couple, whether it’s a company purchase, even say a divorce, divorcing sorry, couple. You will still face this 3% surcharge, albeit you have a 36-month window to sell that main residence and you can then go back and claim the refund. A lot of people felt that for example my side of the fence if you’re divorcing and the husband moves out, that’s fine and you can carry on. That’s not the case under the new rules. As we know and it’s indeed currently already the case you’ve got tougher lending criteria, you’ve got stress testing on interest rates up to 5.5% at the moment. There’s investigations into your wider finances and many would argue this is actually already in place albeit it’s coming more into the public domain. And from next year the rules for landlords to offset all their mortgage interest against their end of year tax bill is going to be phased out and therefore by the end of the decade the higher rate tax payers will get half the relief that they do now. As we’ve also heard on the capital gains side the tax payable on realised gains was 18%, its now under the budget, dropped to 10% for basic rate taxpayers, 28-20% for higher rate, however the sale of residential property is excluded, and the existing rate will continue to apply. So, again many would argue this is an effective 8% increase on any uplift. Now, why are the government doing this? What is their problem so to speak? The government feel that investors have a competitive and indeed an unfair advantage and they are competing with the same types of properties as first time buyers. Their aim is to help more people onto the first rungs of the property ladder, apparently, and they want to see and create stability, and they want to ensure that if the economy happened to get tough again the UK was well insulated from it all, and again we’re faced with the banking crisis once more. And they’re sort of idea is that if they increase the upfront cost, they hope to ease demand and especially protect those, the elderly and retired who have saved and they’ve got their savings tied up in property so again, we’re not going to see sort of the property market fall again so they don’t need to necessarily worry. However, the result of all of this as I see it, they have really put the brakes heavily on buy-to-let investors and especially those internationally based. And again, if you instantly choke the supply of rental properties, your tenants demand is going to go up and if this happens, your rent is going to go up per month and if you are a tenant how are you now meant to save and buy your first property on the ladder. The government obviously saw that one coming and they’ve increased the ISA allowance on the annual allowance and they’ve also bought in the new lifetime ISA. However, if you’re a tenant, if your rent has gone up, again, how do you afford to put money into said ISA. You’re still left with the same problem whereby people are still struggling to get onto the property ladder. The banks are currently and probably will be more unlikely to lend to businesses and individuals and you could argue that the whole economy starts to grind to a halt again. You’ve got the dark clouds possibly looming. Only two days ago quite interestingly the BBC reported that 50% of London’s private tenants cannot afford to pay their rent and this is in tune with one in three apparently falling into debt last year. Where does that leave us for first-time buyers, where does it leave us really as an economy going forward? But it’s not all bad news, he says, what doesn’t change for me is that London, Manchester, Sheffield, Leeds, the whole northern powerhouse ethos, the UK is still seen as one of the safest places in the world to invest in property. And if you want my opinion I think it always be seen that way and it will always be seen as a secure investment. Now, of course Brexit is on the tip of everyone’s tongue. How on earth is this going to affect the market whether we stay in or indeed we go. As I see it and as I’m saying to a lot of people you may have heard this morning, I see is going to be a bit like the general election, and by that, I mean you’ll see a couple of weeks either side of the general election, couple of weeks afterwards you’ll just see a decline in general activity. And what homeowners and investors want is just piece of mind. You only need to look back at the budget that we’ve just had everyone was on the edge of their seat. What’s George going to do this time, he’s going to come in with a low punch surely, funnily enough he didn’t, everyone shrugged their shoulders and thought well we knew that he wasn’t going to do anything, and business is normal and we all move on, that is my prediction. Now, for Brexit I know there are more views on this than I suppose Starbuck’s coffee houses at the moment, but you’ve got to look at the facts. The fact that it’s political and economic stability that is why people are actually investing in the UK. Arguably does the EU, does Brexit, is that going to effect it at all? You go back, you look at some figures released by Knight Frank in 2013, 49% of prime central London property was internationally owned and this was both for investment and occasional use. Again, question mark, did the EU actually have an effect on this? We have the whole argument, businesses are going to relocate if we don’t join the Euro currency, sure enough nothing actually happened. And post-Brexit, could there be arguably pressure on George Osbourne to restrict the number of European investors if we left? Could you say that the new stamp duty surcharge is a pre-cursor to this, and is the Government thinking we may actually leave? Overall, as I said I think the Brexit impact will be low, if we do happen to leave it’s going to take us a minimum of two years to renegotiate our trade deals. Personally, I don’t think that’s going to have a direct effect on the property market as at large. So, how much should one actually view property investment now, as we known as always really being the case, you can’t actually look at short-term flipping, it’s got to be looking at the medium / long-term. Take albeit I know a very extreme example, 3% new surcharge, we have to remember that is a one-off payment. Don’t get me wrong yes, it’s a lot of money, however you compare this with a 22% increase in Newham and which is a specific part of East London which I told various clients to invest in, capital increase last year was 22% in that one year alone. 3% one off, 22% and it will continue for a year. So really what I’m getting at is consider carefully your yields and capital increase and course within that your risk and what you actually want to get out of it. Looking more locally Leeds for example, you’ve got a low initial capital outlay, its affordable to more people, you’ve got some incredibly high yields by comparison, 10% certainly, I hear of people getting even 15 at times which is amazing. You’ve got a modest capital uplift and its arguably fairly low risk and as I’ve mentioned with this northern powerhouse sort of grouping together and gathering a bit of pace that will could change for the better. Compare again, compare it as a extreme, London must be treated as its own country really. You’ve got a very high capital outlay by comparison, you’ve got a significantly lower yield annually at about 3%, more often than not as a generalisation. And you’ve got again, you could have a fairly high capital uplift however that does come with a lot more risk and it’s taking a longer viewpoint. Other thing just to throw in and throw another spanner in is of course Airbnb which some of you may have herd of and for those who don’t know this is an online platform which allows individuals to rent out their spare bedroom to other fellow bnb members. What you’re able to do is offset your maintenance, it’s tax deductible costs you can apply against your end of year tax bill and because you are renting out the room, not the entire flat that is the reason why you can do it. You’ve got as we’ve heard the thousand pound a year digital tax break as the government are calling it. And again, I am advising a lot of clients buy a two-bedroom property. You can offset again the income from this against your mortgage. You’ve got the benefits of the taxation and a lot of the younger clients that I deal with again, it’s useful additional income if they’re not an investor for example. So, moving on is how to buy from a position of strength. If you are an investor what do you actually do, and what are the steps that you need, what do you need to take? As I see it as a preferred purchaser means you are seen by the estate agent and the homeowner as the most reliable and the most secure, despite not necessarily being at the highest offer amount, i.e. you are getting the best deal. So, what are the processes to do and some of these may seem obvious, but I tell you the number of times where people get this completely wrong never ceases to amaze me. Obviously, we are all aware your position is absolutely paramount and now being under offer isn’t good enough, you need to really be knocking on the door of exchange and that ideally you really do be in rented accommodation. There are a lot of people in rented, who’ve got their funds together, you are in competition with these guys. If you are in so much of a chain or under offer, you’re seen as very high risk and you need to just take a view on that. Cash funds, a number of people say well I’ve got the cash, where is it? Oh well it’s all ties up in stocks and shares and I’ve got this fund, it’s a three-month release. Again, if you’re wanting to compete with the mass market on investment terms you need to have this readily available, have your statement have that scanned into your computer and ready to email which I’ll come onto in a second. Mortgage, again always always go through a mortgage broker. And get an agreement in principal without fail, without fail, that will take you two to three weeks to get, then proves to the estate agent and the homeowner that your serious and you’re a good few steps down the line. Conveyancing solicitor as well, make sure they’re appointed, the file is open, they’ve done your client ID, they’re ready to go. Your surveyor, you know they’re ready, they’re on standby and if applicable obviously have your trusted refurb team on standby. Above all it is a people business ensure you got a good personal rapport with the agent and the homeowner. Now, having said all of this, a recent like case study of mine, I was buying for a buying client of mine in North Leeds, we agreed terms on the property and what we were able to do, we supplied without being asked by the agent, upfront proof of our cash funds because it was on email, we had the agreement in principal again on email, we fired that straight through to the agent. Within two hours of us agreeing the deal and that happening the solicitor was chasing the agent for the memorandum of sale, the surveyor was ringing him for access, the mortgage broker was ringing the agent for details. What this did was it actually caught the estate agent completely by surprise because we’ve actually turned the tables on him, and we were now commanding the situation and we were pushing the agent and we were pushing the vendor. What it then meant is that when we potentially came to renegotiate after the survey, which was the case in this instance, we were doing so from a position of strength and we’d proven ourselves from the off. So that is everything. Happily take some questions, I know we’ve run through a lot.