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Civil Servant

Stamp Duty Is Really Going To Hurt In The South East

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Forgive me if this is a very old chain of thought, but I don't think I'm the only one to use this forum to check out the sanity of my own thinking.

We are used to all and sundry proclaiming it is 'different' this time because interest rates are unlikely to go very high. I agree with this, I don't think we are going to see very high interest rates in the near or medium term. I also, however agree with the analysis that the previous crash wasn't actually triggered by higher interest rates but that they came later.

However I'm wondering whether the increases in stamp duty 'enjoyed' under Mr G. Brown esquire have stealthily set themselves up to be something that helps increase the forthcoming slump. Since I STR'd (about 3.5 years ago and, given what I sold - a two-bed look-the-same-flat in Docklands - about the right time), the Civil Service family has undergone some inflation. OK, OK, no puns about all those lovely extra Civil Servants hired by Mr G. Brown esquire. ;)

Following two such rounds of expansion, we may soon be about to embark upon a third. Hurrah. But in this time we have moved through a succession of rented accommodation as our needs have grown. As happy STRs this has been no problem at all. Just end the contract and move right along - possibly to somewhere bigger with the same rent as rent keep falling. However, if we'd had been buying property, it would have been a shocker, especially in the South East.

As we all know, it is perfectly possible to spend an awful lot on not very much in the London area, and quickly lift yourself into the 3% or even 4% stamp duty bands. Lets say you are buying and selling around the 300K mark: with stamp duty (9K), estate agents fees (c.7K) and legal and removal fees (c.3K) you are soon looking at close on 20K out of taxed income just to move - or about 28K of pre-tax if you are a basic rate taxpayer. Now this hurts, but is just about OK if the market is moving up - it simply comes out of the equity you have built up in your (e.g. small central flat) and adds to the mortgage you take out for your larger, more distant house. The flat you bought for 300K with a 10% deposit sells for 400K and you take your 30K deposit, plus 100K equity gain, less 20K costs, onto the new house. And you can console yourself that the value of said house will soon inflate those losses away.

But if you buy said flat for 300K with a 10% deposit, and then sell it even for a moderate loss, say 10K, then the remaining fees of 20K will then utterly wipe out your deposit and lo and behold you are verging on negative equity despite a mere 3% house price fall. You can't move. You've no deposit that you can squeeze out of your property and you are stuck at the mercy of (a) the banks (B) the credit card companies or © mumsy and dadsy.

Now during the escalator of the past 10 years, you could have bought two bed flat as young married couple, moved out to three bed-terrace as couple with sproglet one/and two and then might aspire to a 4 bed detached house in the burbs if number three came along. But if house prices even just grind to a halt, as they seem to have done at present, you can't do this. The escalator has stalled. And you are stuck at whatever point you got to. Yikes.

The result is an impasse in the market. But it can't last for long. The people stuck in their too-small house CAN'T pay extra cash and eventually this will prevail over those with stoshes of equity who want to sell their houses and would LIKE to get every penny the aspirational estate agent told them it was worth. Prices fall.

This would have always been the case, but the 3%, 4% stamp duty surely accentuates this process. It could in course change behaviours. For example, young people in Belgium where stamp duty is c. 16% only ever buy one house - their last one. And rent everything else on the way up.

Is this all tosh? Or does it make sense? Views welcome.

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I also, however agree with the analysis that the previous crash wasn't actually triggered by higher interest rates but that they came later.

I'm afraid you are wrong here.

I lived through that one, and the one before.

Last recession, interest rates rose in whole points, and as a direct result the housing market crashed as people lost their jobs because business as we know works on borrowed money and tight margins.

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No I think you are right in what you are saying. The buying fees are probably making a massive impact on what people can afford. They will force buyers to make lower offers quite simply because that is all they can afford. They will also make people who are thinking of buying think twice especially one they've done the maths and found out what its really going to cost them.

Seems to me that stamp duty will help the correction in quite a big way. :)

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I'm afraid you are wrong here.

I lived through that one, and the one before.

Last recession, interest rates rose in whole points, and as a direct result the housing market crashed as people lost their jobs because business as we know works on borrowed money and tight margins.

may I ask for any figures to back up your claim ?

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Of course, here are the interest rates

http://www.moneyextra.com/dictionary/Inter...ory-003455.html

As you can see the rates rose before the crash of property.

And some dates for you to support my "Claim"

We’ve written before on these pages about the early signs of serious trouble for property, at least the ones we saw last time there was a crash, including a sharp drop in transaction volumes and sizeable developer discounts. But the last UK crash brought up a couple of other interesting signs as well. In the late 1980s, for example, property prices surged first in London and the southeast before a well-reported “ripple-effect” washed into the north and west. Then, when the crash started (in 1989), it started in London and rippled out to the rest of the country the following year. We’re following the same pattern this time: the property market boom clearly started in London and the southeast, yet over the last year the biggest gains have been reported in areas such as the north, Scotland and Wales. If prices follow the same pattern this time - and it is likely they will - we can expect price falls to ripple out again to the currently strong areas

Another sign (and this is my favourite) is non-stop industry denial. Property insiders are predicting a gentle slowdown in the UK’s housing market, just as they did in 1989. The Royal Institution of Chartered Surveyors asserts that low rates and low unemployment mean a crash “is not on the horizon”. This, despite the fact that unemployment was also at a decade low in 1990. It didn’t prevent a crash then. In fact, the crash in property and consequent recession were what then sent the unemployment rate up from a ten-year low of 6.8% in 1990 to more than 10% by 1994. To me, the extent of the denial is as good as confirmation.

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Is this all tosh? Or does it make sense? Views welcome.

Your comments about "mobility cost" in the SE are quite right and the main reason for me refusing to buy.

The mthly costs of renting v buying may be pretty comparable.....however factor in transaction/commuting costs and the need to be flexible/mobile in todays working world and buying for me is plain financial madness.

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Therefore the Crash started in 1989, with interest rates of 15%.

That was the catalyst that caused prices to crash as businesses shed staff, unemployment went up to 10% the following year!!.

Now we have 10% unemployment today, although due to massaged figures and job creation schemes in doing non jobs in government departments the figures are fiddled.

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As I understood it with stamp duty. That top level was only ever meant for rich people living in palacial circumstances. If the cost of an average house is too high to fall below the level of rich people's housing, either we are all incredibly rich, or something is wrong. I do think the 250K is at about the right level. But what is wrong with this picture?

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Your comments about "mobility cost" in the SE are quite right and the main reason for me refusing to buy.

The mthly costs of renting v buying may be pretty comparable.....however factor in transaction/commuting costs and the need to be flexible/mobile in todays working world and buying for me is plain financial madness.

Stamp duty is effectively a tax on property sellers rather than buyers. Buyers will pay as much as they can afford in a competitive market, sellers take what they can get.

If a buyer has £x available for a purchase, he will generally spend £x to get the best possible house for his money. When stamp duty is imposed, he still only has £x available. But if he has to pay 3% stamp duty on his purchase, he only has £(x-3%) available for the seller.

The seller receives £(x-3%), losing 3% to the Treasury.

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Stamp duty is effectively a tax on property sellers rather than buyers. Buyers will pay as much as they can afford in a competitive market, sellers take what they can get.

If a buyer has £x available for a purchase, he will generally spend £x to get the best possible house for his money. When stamp duty is imposed, he still only has £x available. But if he has to pay 3% stamp duty on his purchase, he only has £(x-3%) available for the seller.

The seller receives £(x-3%), losing 3% to the Treasury.

I think that as buyers have had a hazy idea of the cost of paying back the mortgage, and lenders have not been too bothered about multiples, ability to repay etc, the cost may have been met more by buyers than sellers in the past. But that will change as you say.

The Blairs paid about £144,000 in stamp duty alone. A few years ago, the price of that house might have been say £1.2 million and the stamp duty just £12,000. Ouch.

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Stamp duty is effectively a tax on property sellers rather than buyers. Buyers will pay as much as they can afford in a competitive market, sellers take what they can get.

If a buyer has £x available for a purchase, he will generally spend £x to get the best possible house for his money. When stamp duty is imposed, he still only has £x available. But if he has to pay 3% stamp duty on his purchase, he only has £(x-3%) available for the seller.

The seller receives £(x-3%), losing 3% to the Treasury.

So if the seller then buys another house, they will have 3% less money available.

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Stamp duty is effectively a tax on property sellers rather than buyers. Buyers will pay as much as they can afford in a competitive market, sellers take what they can get.

If a buyer has £x available for a purchase, he will generally spend £x to get the best possible house for his money. When stamp duty is imposed, he still only has £x available. But if he has to pay 3% stamp duty on his purchase, he only has £(x-3%) available for the seller.

The seller receives £(x-3%), losing 3% to the Treasury.

So if the seller then buys another house, they will have 3% less money available.

My thoughts exactly, Jeff. ;)

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Here's the lowdown on TTRTR's finances (confirmed as being "damn close" to actual by TTRTR himself):

Equity £1.2m (after 8% loss on Wandsworth property as per land registry quarterly report)

Debt £2.25m

Total portfolio value = £3.45m

gearing = 65%

Annual income (yield of 6.75% on £3.75m) = £253k

Annual interest payments @ 5% = £112k

Profit before expenses = £141k

Depreciation (Land registry, 8%)= £300k

Net loss £(159)k

TTRTR is in trouble.......

I dont understand, 300k depreciation?.

His properties are appreciating surely at 5% per annum as per Land Registry Stats.

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Yes, one of my sisters was looking at moving location in London, for same price house.

She worked out it would cost about 50k, (stamp duty, agents fees, moving costs) so they will stay put & look at renovating instead.

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Thanks Okunu.

We are hesitating getting back into the chain not just because of our fears of HPC, but also because of transaction costs in a 'soft landing' scenario - one which I don't rule out entirely (although I do rule out substantial further HPI). In a rising market, stamp duty, estate agents fees etc. etc. get paid out of equity or 'funny money'. I call it funny money because it has no relation to what I earn in my day job at all: and so one can't comprehend it fully in the way that you can when comparing a 300 quid telly to a 500 quid one. As long as the HPI escalator is going up, you factor out this 'funny money' because you've made so much more in your house.

However, if the HPI escalator has stopped (it doesn't actually need to fall), then as Jeff, Smell the Fear etc. point out, fees and stamp duty begin to erode your buying power. If you aren't making money through living in your house, then such fees begin to have to be paid out of salary. Paying 20K out of massive untaxed equity gain may not hurt. Paying 20K out of hard-earned taxed, NI'd salary really does hurt. A lot. This may prompt a collective seizure and hesitancy to move.... and we all know where that leads to! :D

I'm hoping our STR strategy will yet lead us to skipping a couple of rungs on the ladder.

CS

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I bought a 1-bed flat in 1998. My total mortgage was £60k. Stamp duty was less than £1k.

If I wanted to buy a 3-bed house today, in the same area, the stamp duty alone would be £25k :ph34r:

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... In a rising market, stamp duty, estate agents fees etc. etc. get paid out of equity or 'funny money'. I call it funny money because it has no relation to what I earn in my day job at all: and so one can't comprehend it fully in the way that you can when comparing a 300 quid telly to a 500 quid one. As long as the HPI escalator is going up, you factor out this 'funny money' because you've made so much more in your house.

Interesting point that, and I think this is one reason why the HIPS (Home info packs) may have a larger impact than expected when they come in next year. The point being that the cost of the HIP has to be stumped up in advance, i.e. paid out of 'real money' rather than the 'funny money'.

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Therefore the Crash started in 1989, with interest rates of 15%.

It is true that rates increased to nearly 15% in 1989, the year when the crash started.

However, what seems to be seldom mentioned is that rates had mostly been high through the 80s (e.g. 14% at the beginning of 1986). Lawson had ordered a series of contraversial rate cuts from 1985 to 1988. This dovish monetary policy caused the so-called "Lawson boom", an inflationary / credit bubble one aspect of which was the crazy heights which property prices reached in 1988. The accusation at the time was that Lawson had cut rates not to help the economy in the long term, but to help win the 1987 election.

So, what caused the crash, the fact that rates were increased, or the fact that they were cut so recklessly throughout the late 80s? If Lawson had held rates at their 1986 level, surely the house price spike would never have occured in the first place.

frugalista

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  • 301 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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