Well, at last it’s happened – UK property prices are on their way down. 

Two lenders this month – Nationwide and the Halifax – both reported a 0.3 % monthly drop in January compared to the previous month.

Halifax said it was the first fall since April last year when COVID-19 began to kick in. Nationwide only puts it back to June. However, despite the discrepancy in when prices started to rise, there is no denying they are now on the downward curve. 

Despite this, Halifax says prices continue to fare better than the previous year – with a 6.4 per cent increase year-on-year.

Slow and steady – or a cliff edge plunge?

Whether that fall is a slow one or a cliff edge, considering the end of the Stamp Duty Holiday at the end of March, remains to be seen. Certainly, the end of the furlough scheme doesn’t bode well either, with thousands of people expected to lose their jobs – and at a time when the economy remains shaky. 

And, despite pleas to continue the Stamp Duty Holiday, the chancellor is believed to be considering increasing Capital Gains Tax. As far as Stamp Duty is concerned he believes it’s a case of ‘Job done and time to move on,’ according to his staff.

Not everyone is pessimistic though. There is a shortage of properties coming on to the market – some estate agents report 70% fewer compared to the previous month – which will always ensure prices remain high. This is especially the case when buyer demand remains strong. The large-scale vaccination roll-out should help kick-start the economy again too.

Jonathan Hopper, CEO of Garrington Property Finders, predicts a “soft landing rather than a crash.”

He explains: “Clearly the white-hot pace of price rises seen in the second half of last year is cooling, but with so much pent-up demand in the system, the overall momentum is set to continue.” 

People still desperate to move home

Other property analysts agree – but for different reasons. One broker said he was aware that the effect of COVID-19 and the various lockdowns had forced people to reassess their living conditions long-term. The result was people still wanted to move to larger homes with gardens and outside cities – and this would continue right through 2021 for those who could afford to buy.

Many mortgage brokers are predicting that a poor economy could encourage the Bank of England to drop interest rates even further, resulting in sub 1% mortgage loans by summer.

And yet, there were more mortgage approvals in 2020 than in the previous year, according to the latest Bank of England figures. 

More bad news for first time buyers

Another plus for the property market is the knowledge that it costs more to rent than it does to buy. Whether that helps first time buyers get on the market though is debatable, especially in light of a recent estate agent survey which showed house prices had risen far above average earning potential. Benham and Reeves reported it as the biggest gap in a decade.

The average income last year was around £25,123 and the average house price at £249,633. That puts house prices at 10 times the typical salary, with an entire year’s salary needed for a deposit.

He always swore it would end on March 31 this year and indeed, Rishi Sunak looks even more determined in his vow to bring the Stamp Duty Holiday (SDH) to a close on March 31. This is despite the pleas of estate agents and others in the property industry.

In his reasoning, the Chancellor points to both a strong housing market and annual house price growth of 7.6%. Both indicate to him that he’s managed to keep the property market afloat during the pandemic and that it is now time to concentrate on ‘more needy’ sectors.

Certainly, the policy where buyers saved £15,000 on the first £500,000 of a new home, seems to have worked – to an extent. As well as ensuring the property market remained buoyant, it has also saved a number of jobs in the industry. 

First-time buyers lose out again

What it hasn’t achieved though, is to help first-time buyers get on the market. Deposits of 20% were tough enough to secure before prices started to rise. New HM Revenue & Customs figures to November last year show the 7.6% house price rise was the highest since June 2016 and now brings the average UK property to a value of around £250,000. 

The end of the SDH may also see up to 100,000 property transactions fall through if they don’t make the March deadline. Sunak, though, is believed to be focusing his May 3 budget on other priorities, such as the hospitality and leisure industries where there has been high unemployment as a result of the pandemic.

Estate agents already noticing fall in buyers

A spokesperson for NAEA (National Association of Estate Agents) Propertymark said its members had noted a large fall in prospective buyers from 580 to 348 between November and December last year. It expects that number to fall even further in January with the SDH deadline getting ever-closer. 

“While we would ordinarily expect to see a lull over the festive period, these numbers show that the tightening of lockdown restrictions, coupled with the reality that many individuals would no longer meet the stamp duty deadline, has exacerbated this,” he said.

Prime London property plummets

One area to have suffered in particular during the series of UK lockdowns is prime London property – an area where saving £15,000 is a mere drop in the ocean for wealthier buyers. In some high-end postcodes prices have even plummeted as much as 40% (Mayfair), while St James’s doesn’t fare much better. 

The reason for the drop in prices has been ascribed to the lack of foreign buyers since the pandemic struck. International property analysts believe that the situation may well right itself once travel restrictions have been lifted, as the reduced prices will be too tempting for many wealthy overseas buyers to resist. This is despite the 2% surcharge they will have to pay after  April 1.

Meanwhile, other less-affluent-but-still-expensive areas of the capital have fared better. The price of property sold in Chelsea, for instance, has gone up by 23% since the start of the pandemic.

Buy to let companies were the second most popular type of firm in 2000. Only online retail companies beat them to the top spot.

The rise of buy to let housing companies shouldn’t really come as any surprise to those in the property business though. Analysts always predicted self-employed portfolio landlords would set themselves up as a company in order to avoid the sweeping tax cuts facing landlords – and which came to a head last year.

As a result, the number of buy to let landlords forming companies had increased by 4.1% in December last year. That meant a huge 41,700 new companies were formed in 2020 – 23% more than in 2019 – and bringing the total number of landlord property companies to more than quarter of a million, at 228,743.

Cuts to landlord mortgage interest relief phased in completely

Introduced by George Osborne back in 2015 his tax reforms scrapped landlord tax relief on mortgage interest payments and forced many UK landlords with one or two properties to sell up. But others, who had a handful of buy to let investments, traded their self-employed tax status to that of a company instead. That way they pay corporate tax, which is 19% on rental income – and set to drop to 18%. A higher or additional tax rate landlord paying self-employed income tax would be due to pay tax of 40% to 45%.

Instead of being able to claim up to 40% or 45% mortgage tax relief deduction as pre-2016, the only concession higher and additional rate landlords have is a 20 per cent tax credit on mortgage finance costs.

The landlord tax relief cuts started in 2016 with a 25% reduction every year until 2020 when they were phased out completely. As a result, there were more buy to let companies formed between 2016 to 2020 than there were in the previous half a century – an increase of 128% to be exact, according to Hamptons International who researched the sector.

At the time, the then Chancellor was warned his cuts to landlord mortgage relief would severely reduce the number of private rented properties available. Four years later this is certainly the case.

Other landlord tax measures introduced by Osborne

Landlord mortgage interest relief wasn’t the only buy to let tax measures introduced by George Osborne at the time. He also brought in new Stamp Duty measures where investors (and those buying a second home) had to pay an additional 3% surcharge on top of normal stamp duty rates. Both self-employed landlords and company landlords have to pay this additional tax when adding to their property portfolios today.

The automatic 10% tax relief discount for replacing furniture due to wear and tear was also abolished. Today landlords can charge for replacement furniture – but only if it costs around the same as the original item.

The prickly subject of Capital Gains Tax

Many finance analysts believe current Chancellor Rishi Sunak is considering increasing Capital Gains Tax (CGT). It’s been mentioned previously by this current government and now seems all the more likely considering their pledge to keep income tax, VAT and National Insurance the same.

CGT is the tax paid on any profit you make above £12,000 when you sell a property. It’s 18% for a basic rate tax payer and 27% for those who pay a higher rate. From April 2021 this will have to be paid 30 days after the sale (rather than by the end of the tax year, as previously).

Cuts have already been made here to accidental landlord allowances. Previously they only had to pay CGT on profits above £40,000 if they had rented out their main home. Now, they only get the relief if they actually still live there too.