Thursday, March 22, 2012

London immunity is over-rated.

London market hits meltdown within hours of Budget

The London property market plunged into meltdown yesterday. The effects were seen in the rapid wake of the Chancellor’s bombshell announcement that purchasers using companies as the buying vehicles of £2m-plus properties would be stung by 15% Stamp Duty as from midnight. In London, buying via company vehicles is extremely common. Within hours, London agents were reporting chaos, as deal after deal fell through. First to warn was Ben Everest, partner at LDG in the West End. He said that there had been a ‘dramatic’ effect, with deals in the region of £2m-£2.5m being urgently re-negotiated downwards.

Posted by sibley's b'stard child @ 11:55 AM (6511 views)
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41 thoughts on “London immunity is over-rated.

  • If everyone is racing to get those £2m deals through before the deadline, won’t we be seeing the abnormal activity in London reflected in the month end Price Index figures?

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  • There’s more. From yesterdays Budget:-

    tackle the ‘enveloping’ of high value properties into companies to avoid paying a fair share of tax. The Government will introduce a 15 per cent rate of SDLT to be applied to residential properties over £2 million purchased by non-natural persons, such as companies. This new rate will take effect on 21 March 2012. In addition, the Government will consult on the introduction of an annual charge on residential properties valued at over £2 million owned by these persons with the intention of legislating in Finance Bill 2013 for commencement in April 2013

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  • mark wadsworth says:

    It’s in crazy meltdown here in London, I can see out of my office window, the block of flats opposite is leaning heavily to one side and huge dollops of concrete and steel are dripping down onto the pavement, like in that Salvador Dali painting of a watch in the desert. There were queues of Saudis and Russian oligarchs at the Tube station trying to buy tickets to Heathrow to avoid the massive wealth destruction which Osborne has unleashed. Big rocks have started to fall from the sky and dogs are mating with cats.

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  • richy richless says:

    What khards said with bells on.

    So now we have a buyers market developing in London with downward pressure on prices. Lovely jubly. This should be the tipping point that sends the headline indices negative MoM.

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  • Ouch, that’s got to hurt.

    Our Government are right to cash in on ‘cash cow London. They have had it too good for too long and now should be contributing to our budget deficit.

    15 % rate could rise significantly if needed, IMHO.

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  • Since EAToday is the source here, it’s worth noting that last week the majority-view there was that Gideon would come to the housing market’s rescue and decide not to reimpose the lower stamp duty threshold. Seems that didn’t happen…

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  • Is it wrong to fantasise about Poxtons agents leaping off the nearest tall building ?

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  • sibley's b'stard child says:

    This article ties-in rather nicely with yesterday’s VI-laden wailing Independent piece (an unfortunate casualty in the archive loss) from EAs warning that downward pressure on London HPs would literally cause the sky to fall in (as MW alludes to).

    The piece then went on to contradict itself with an unintentionally laugh-aloud quotation from, er, an EA:

    ‘She said: “There is a massive shortage of family homes in London’s villages and given price growth expectation, growing demand will push average three and four-bedroom family homes in many areas such as Islington into the top stamp duty tier within a year or two, making it even harder for families to commit to staying in the city.”

    So there you go, if you live in Zones 2-6 you’re obviously a transient labourer with no employer-loyalty. Of course, this shocking news means such homes will never be purchased by anyone, at any time, ever again.

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  • mark wadsworth says:

    SBC, the quotes from EA’s yesterday were madness squared.

    One such EA said “Everybody in London wants to trade up, 7% SDLT will stop people from trading up so everybody will be forced to pay higher prices to live in a smaller house, a plague of locusts will descend etc”.

    These idiots never explain what’s going to happen to the people at the very top of the “property ladder” if everybody below them moves up a rung. Where are they going to move to?

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  • The agents seem have been caught off-guard by the thoroughness and suddeness of our Geroge’s measures..

    They probably figured that he make a gesture towards closing loopholes, but not just yet – and then leave one or two open so that life could proceed much as before..

    Now he’s not only talking about closing existing loopholes immediately, but also promising to take prompt and retrospective action to seal any new ones that emerge..

    Suddenly, that Cayman Island company formed for the sole purpose of buying 69 Acacia Ave. has become a liability instead of an asset – oh dear…

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  • Also what will happen to those savvy investors who have just purchased 2 million pound homes want to sell them??

    Looks like they have just lost 7%. Hard luck!

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  • mark wadsworth says:

    Khards, they needn’t worry.

    According to Uncle Tom, because the legal liability for SDLT is with the purchaser, he also bears it in economic terms. So according to his logic, if you bought a house for £2.1 million yesterday (at 5% SDLT) you have only lost the 5% that you (as purchaser paid) and you will have no problem selling it tomorrow for £2.1 million.

    Of course, in the real world, that £2.1 million will get knocked down by about 2% (it was already depressed by 5% and now it’s depressed by 7%), so in real terms, your savvy investor has indeed lost 7%. In Uncle Tom’s topsy turvy world, he has only lost 5%.

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  • Nat “King” Cole song now being piped into Estate Agents up and down the country

    The party’s over
    It’s time to call it a day
    They’ve burst your pretty balloon
    And taken the moon away
    It’s time to wind up the masquerade
    Just make your mind up the piper must be paid

    The party’s over
    The candles flicker and dim
    You danced and dreamed through the night
    It seemed to be right just being with him
    Now you must wake up, all dreams must end
    Take off your makeup, the party’s over
    It’s all over, my friend

    The party’s over
    It’s time to call it a day
    Now you must wake up, all dreams must end
    Take off your makeup, the party’s over
    It’s all over, my friend

    It’s all over, my friend

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  • mark wadsworth says:

    UT, as you well know, yesterday’s articles are chewed up, the exchange was as follows:

    MW: SDLT is borne by the vendor

    UT: haha wadsworth you’re an idiot, SDLT it paid by the purchaser

    MW: don;t be a smartarse, read what I said instead of misquoting me, I said that SDLT is BORNE by the vendor, that is q

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  • mark wadsworth says:

    uite different from saying that the legal liability to pay SDLT is on the purchaser. but legal and economic incidence are two quite different things.

    UT: haha, you’re an idiot and I wouldn’t employ you as my tax advisor

    MW: you wouldn’t be able to afford me:
    —————————
    To sum up, my view is that somebody who bought a £2m + house yesterday with 5% SDLT would have to drop the price by about 2% if he wanted to sell it tomorrow. That is the ECONOMIC incidence of the tax. The fact that the purchaser is under a legal obligation to hand over teh cheque for 7% to HMRC is a separate issue.

    Either you agree I was right all along, or you disagree, in which case you are claiming that house prices in central london will be entirely unaffected by the SDLT increase. One or t’other.

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  • Ok, imagine SDLT was 25%, who pays the price then?

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  • mark wadsworth says:

    Khards, to the extent that homes were ever bought and sold, the vendor.

    Say you’ve saved up cash of £100,000 to buy a £100,000 house expecting 0% SDLT, let’s say you’re living in that house and paying £5,000 a year rent, so you’re happy to pay £100,000. Now imagine that SDLT is increased to 100% of purchase price the day before exchange/completion.

    Chances are the vendor will pull out of the sale and continue to rent it to you but if he presses ahead, the most you are willing and able to pay, inclusive of SDLT is still £100,000 (you aren’t going to pay £200,000 are you?), so the price falls to £50,000 and you pay the £50,000 price and £50,000 stamp duty on top. That’s still a good deal for you as long as you have your “purchaser” hat on.

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  • I’m in agreement with MW on the SDLT debate ie ultimately it is borne by the seller albeit the buyer typically makes payment to the Solicitor who lodges the papers/fee in Blackburn.

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  • mark wadsworth says:

    On a minor and technical note, the legal liability to pay was not placed on the purchaser until Finance Act 2003. Prior to then, it was never stated who had to pay, it was tradition that the purchaser paid it, or else he’d never get his title registered, that’s all.

    This is why the Dutch invented Stamp Duty back in the 17th C – it is self-enforcing; certain contracts were not legally binding until Stamp Duty was paid, so the purchaser was quite keen to pay it.

    It’s still a bad tax though.

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  • MW,

    I don’t think I was rude enough to call you an idiot, although it is tempting at times…

    Your premise about who ultimetely ‘bears’ the burden of stamp duty depends on the circumstances of the transaction.

    If someone is buying to the limit of their ability to afford, then your argument that it is borne by the vendor has some validity, but that is very much the circumstance of the plebs.

    When it comes to the super rich buying seven figure London property, it is often the case that affordability has little bearing on their decision making – they know what they want and where they want it, and can afford to pay whatever is required.

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  • UT
    but there is a pool of super-rich competing against each other. If your last comment were literally true prices would be, er, infinite, no? Super-rich or not, they presumably have a ‘reservation price’ of some sort.
    N

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  • er, maximum bid, that is.
    N

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  • Have to agree with UT. The price of the transaction is set by both the buyer and seller agreeing a price. Therefore the assumption that an increase in SD will lower the price by an equal amount and therefore borne by the seller, is not necessarily true. The increase in SD will be borne by both the seller and purchaser, and obviously not necessarily equal amounts.

    The article states many transactions are falling through, as neither side believes they should shoulder the extra tax, or portion of the tax increase

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  • mark wadsworth says:

    Uncle Tom, agreed, what goes on with Saudi oil princes in central London has nothing to do with anything, it is complete madness and normal rules of economics don’t really apply, there is no concept of “value for money” or anything.

    But in the normal course of events, and there is plenty of evidence from short lived stamp duty exemptions (whether that affects a region or a particular typ of purchaser) which UK governments have dabbled in over the years that there is no significant change in the number of transactions and all that happens is the prices go up ever so slightly. It is real life fact and observation. If anybody has real life evidence to say otherwise, I would be interested to know. You can muse all you like as to who pays the tax, your musings do not count as evidence.

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  • I expect the tax lawyers are already working on a way to get around this tax anyway. What about 99-year short-term tenancy agreements?

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  • I can think of one easy way to avoid the new 7% SDLT – don’t buy a massively overpriced property.

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  • mark wadsworth says:

    Stuart, the sale and grant of long leases are also liable to SDLT, it gets all very tricky and technical, but broadly speaking, it makes no difference.

    Jack C, according to the Evening Standard, most family homes in London cost £2 million and upwards, they reckon it’s the new normal. They are of course lying through their back teeth, that might be true for ten inner postcodes, but Zone 3 and outwards, you can get somewhere nice for a modest £500,000. In other words stupid prices rather than insane prices.

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  • UT: haha, you’re an idiot and I wouldn’t employ you as my tax advisor

    MW: you wouldn’t be able to afford me

    UT is a boomer, he can afford it.

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  • MW – a modest half million – I love it – the world gone mad.

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  • mark wadsworth says:

    Paul, no he wouldn’t, these people are famously “asset rich, cash poor”, aren’t they? That’s why we have to tax incomes and not land values, to ensure that they become asset richer and everybody else becomes cash poorer.

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  • mark wadsworth says:

    Jack, seriously, you sit on the Tube reading the Evening Standard along with everybody else reading the Evening Standard with their tales of normal hard-working families in their £2 million homes, all of you commuting back to Zone 3, 4, 5, and you wonder “Am I the only person who realises this is all complete lies and that the ES lives in a fairy tale world?”

    I suppose anybody coming from a normal part of the UK where £300,000 is a tip top high end 5-bed mansion thinks that the people in Zone 3,4,5 are insane for thinking that £300,000 is a fair price for a small terraced house on a not-so-nice street twenty minutes walk from the station.

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  • Overnightwill says:

    MW – “I suppose anybody coming from a normal part of the UK where £300,000 is a tip top high end 5-bed mansion thinks that the people in Zone 3,4,5 are insane for thinking that £300,000 is a fair price for a small terraced house on a not-so-nice street twenty minutes walk from the station.” – yes!

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  • MW,

    You seem to make the presumption that the great majority of home buyers are constrained by the limits of affordabitity.

    Giving that notion a little thought, I came to the conclusion that while that is true for a large minority, notably most FTBs; the majority of UK homebuyers could, if they wished, afford a more expensive property if they were minded to do so; from which one can conclude that your notion that stamp duty is ultimately borne by the vendor is not just wrong in a minority of cases, but mostly so.

    As they say in the US – do the math..!

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  • markj69 str05 says:

    UT, another factor IMO is the state of the market. If teh market is in decline (A buyers market), then teh purchaser has more of a lever to pass those costs onto the vendor (IE drop the price accordingly). In a sellers market, the buyer wouldn’t have a chance. The area is also a huge factor on desirability, and again skews things. There is no definative conclusion. The reasoning remains very fluid.

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  • mark wadsworth says:

    UT, OK, so why don’t you get on to all those silly economists who say that relative elasticities of supply and demand dictate who bears a tax and explain them the “Uncle Tom rule” that the tax is borne by whomever you say it is. How is it that everybody who has looked into the topic in any depth comes to the same conclusion, but you, on the basis of no facts or research whatsoever can just overturn this logic?

    Why not go one further and say that if interest rates rise, landlords will pass on the increase to their tenants? Why not write to all the investors who sold Greggs shares in response to the VAT hike on hot food and tell them that VAT doesn’t afffect Greggs as VAT is paid AND borne by the consumer?

    Your example that plenty of people could trade up if they wished is nonsensical, yes, a lot of people ‘could’ but unless they are determined to do so, they are simply irrelevant for this debate. And if they were minded to trade up, then they would set some sort of budget, however high or low, and the SDLT comes out of that budget.

    MarkJ69, good example. If prices are rising, then clearly demand is less price sensitive, so they would bear some of the SDLT, if prices are flat or falling, demand is more price sensitive and vendors bear all the SDLT.

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  • orcusmaximus says:

    [email protected] I don’t think I was rude enough to call you an idiot, although it is tempting at times…

    You were that rude. I wasn’t surprised that MW got a bit miffed. Mind you, with libertas around, Marks on a bit of a short fuse these days.

    [email protected] You seem to make the presumption that the great majority of home buyers are constrained by the limits of affordability.

    That’s quite a reasonable assumption. Market prices are decided by supply and demand, and it’s been fairly conclusively shown that supply in the housing market is not so much the supply of houses, but the supply of credit.

    mark [email protected] – You calculate that increasing stamp duty from 0% to 100% halves the selling price. Lets try a new calculation involving borrowing and a 90% LTV

    After paying for solicitor and moving costs, our buyer has £20,000 cash for his deposit and stamp duty.

    HousePrice = Deposit + Loan
    Loan = Deposit / (1 – LTV)

    HousePrice = Deposit + Deposit/(1-LTV) = (1 + 1/(1-LTV))Deposit
    Deposit = Cash – StampDuty

    HousePrice = (1 + 1/(1-LTV))(Cash – StampDuty)
    StampDuty = HousePrice*SDLT

    HousePrice = (1 + 1/(1-LTV))(Cash – HousePrice*SDLT)

    HousePrice/(1 + 1/(1-LTV)) = Cash – HousePrice*SDLT

    HousePrice(SDLT + 1/(1 + 1/(1-LTV))) = Cash

    HousePrice = Cash/(SDLT + 1/(1 + 1/(1-LTV)))

    Plug in constants of LTV 0.9 and Cash of £20,000
    HousePrice = £20,000/(SDLT + 1/11)

    If our buyer is a first time buyer and gets an SDLT of 0%, he can afford to pay £20,000/(1/11) = £220,000

    However, if this exemption is removed, and he now has to pay SDLT of 1%, our buyer can afford to buy a house for £20,000/(0.01 + 1/11) = £198,198.

    So, the 1% stamp duty of £1,982 paid by the buyer costs the vendor £21,802.

    I’ve always loathed stamp duty, but I hadn’t realised it’s effect on depressing prices so much.

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  • orcusmaximus says:

    Hmm. A mistake in my calculations there, the initial calculation with 0% SDLT should have come out at £200,000. Lets try again

    HP = 10 * D
    D = C – HP*SDLT

    HP = 10(C – HP*SDLT)
    HP = 10C – 10*HP*SDLT
    (1 + 10SDLT)HP = 10C
    HP = 10C/(1 + 10SDLT)

    C=20,000, SDLT = 0
    HP = £200,000

    C=20,000, SDLT=0.01
    HP = 200,000/1.1 = £181,818

    Better! A difference in £18,682 on the selling price for £1,818 stamp duty.

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  • mark wadsworth says:

    Orcus, yes, the fact that deposits are so small exaggerates the downward impact of SDLT (I’d forgotten about that bit in the heat of the moment).

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  • Prices will continue to be supported. I simply don’t see this as that bigger a deal.

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  • UT22: If all the rich forriners can afford to pay whatever is required, and the UK is in debt, then the logical thing to do is make stamp duty on houses over £5m 100% (or higher).

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