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Christmas Eve brought the news that Boris Johnson had conclusively agreed on a Brexit deal for the UK with the European Union. This gave optimism that the economic turmoil of leaving the EU would be radically reduced, yet what will this ‘trade deal’ do to the value of your Luton home and the mortgage payments you will have to make?
Since the summer, the Luton property market has been booming, yet many commentators have cautioned that the momentum cannot last. With unemployment and the end of Stamp Duty Holiday on 31st March, the Halifax reported last week that they believed UK house prices would drop by at least 2% (and in some areas 5%) in 2021.
I find it fascinating the Luton property market has defied the doom and gloom swamping the wider British economy in the last seven months. The Luton property market has profited from the large swell in demand from better-off existing Luton households trying to buy larger Luton houses (as they are required to work from home) together with the added benefit of saving money from the Stamp Duty Holiday.
Luton house prices are 2.7% lower than a year ago, making
our local authority area the 387th best performing
(of the 396 local authorities) in the UK.
With the Brexit deal being voted through in the Commons on the 30th December, many say this will boost the property market just as the Government-backed measures supporting the property market come to an end. Yet, in the face of rising unemployment due to the pandemic, the Brexit deal may do little more than avoid uncertainty for the Luton housing market.
What will happen to Luton house prices?
The Luton property market in 2019 was held back because of the uncertainty of the Brexit deal. In January 2020, we saw the demand released in the fabled ‘Boris Bounce’, only for buyer and seller activity to fall off a cliff in March during the first lockdown. It then took off like a rocket once lockdown was lifted. UK house prices are 4.19% higher today, year on year (although some areas are breaking the mould, like Aberdeen whose house prices have dropped by 5.1% and at the other end of the scale, Worcester’s house prices have increased by 11.9% year on year). A lot of that growth in UK property prices has been fuelled by buyers spending their stamp duty savings on the purchase price of their new home. Yet, it cannot be ignored.
Of the 100,400 workers in Luton, 9,400 are still on furlough (although roughly 40% of those people are still only on part-time furlough).
When the furlough scheme ends in April 2021, unemployment is likely to rise to in excess of 11%, whilst the protection for the homeowners utilising mortgage holidays will finish.
Piloting the rocky shoreline of the recession is more important than any Brexit deal for Luton homeowners, buy-to-let landlords, buyers and sellers.
In April, the market will also be dealing with the end of the Stamp Duty Holiday, which is due to come to an abrupt halt on the 1st April 2021. Consequently, we will continue to see the house price index's show growth in the first half of 2021. They will then recede as the prices of Luton homes purchased after the 1st April 2021 reflect the lower price paid (because buyers would have had to pay for their stamp duty again). Therefore, probably by the end of 2021, the Halifax may be correct, and Luton house prices will be 2% to 5% lower than they are today, simply because of the stamp duty.
What will happen to mortgage rates?
The real benefit from the Brexit deal is that there will be no tariffs on most goods coming into the UK. 52% of all goods imported into the UK are from the EU (totalling £374bn per annum). The UK Government were planning to add between 2% and 10% tariffs under World Trade Organisation rules on the vast majority of those goods. Price increases because of those tariffs would have fuelled inflation, meaning the Bank of England would have to increase interest rates. Although 77.2% of British mortgages are on fixed rates (paying an average of 2.16%), eventually those increased Bank of England rates would have fed through into higher mortgage payments. To show you how vital low interest rates are …
the average Luton homeowners’ mortgage is £384.35pm,
owing an average of £156,702.
Yet if interest rates rose only 1.5%, Luton homeowners’ monthly mortgage payments would rise to £580.23 pm, and if interest rates were at their 50-year average, then the mortgages payments would be an eye-watering £1,129.99 pm (note all mortgage payment figures mentioned above are only for the interest element of the mortgage- the capital repayment element would be additional and variable depending on the length of mortgage).
As I have mentioned many times in the articles I have written about the Luton property market, low interest rates are vital to ensure we don't have a property market crash. That's not to say just because they are at an all-time low of 0.1% to aid the economy that there won’t be some form of realignment of property prices later in the year (as mentioned above). Yet low interest rates mean people can still pay their mortgages, so there won't be panic selling. That would mean there won't be a flood of property come to the market (like there was in the 1988 and 2008 property crashes when interest rates were much higher), suggesting property prices should remain a lot more stable.
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12 months ago, the unemployment rate in Luton stood at 3.1% of the working population, yet with Coronavirus hitting the UK, what impact will this rise in unemployment have on the Luton property market?
As I have discussed a number of times in my articles on the Luton property market, this summer saw the Luton property market do exactly the opposite of what was expected when Covid hit.
The Stamp Duty holiday added fuel to pent up demand for people to move to property with extra rooms (to work from home) and gardens. This prompted a brief hiatus in the number of people selling and buying their home in Luton over the last summer and autumn.
Yet, insecurity around rising unemployment, led to many mortgage companies becoming more cautious in the later months of summer, predominantly when lending to the self-employed or first-time buyers borrowing more than 85% of the value of the home (as they wouldn’t want to lend money to someone that could not afford a mortgage due to an insecure income or not having a job).
Back in the late spring, economists were predicting that UK unemployment would rise to a peak of 6.5% in Q3 2020, returning back to the 2019 levels (3.4%) by 2022.
As we speak (Christmas 2020), nationally the unemployment rate stands at 6.3%. The toll Covid has had on people’s livelihoods has been massive, with an additional 1,434,515 people out of work, although it is important to note this unemployment rate is still lower than the five years following the Credit Crunch years - 2008 to 2013.
So, with such a growth in unemployment and the spectre of a ‘No Deal Brexit’, this may hold back the enthusiasm of many companies to take on more staff, reducing any rebound in employment. If unemployment remains high, this will influence perceptions of employment and personal/household financial security, which are the ultimate drivers for both house prices and whether people buy and sell.
4,220 Luton people were unemployed a year ago and today that stands at 11,580.
Looking at all the study papers on the topic, there is a link between unemployment and house prices, yet it’s not as strong as you would think. The larger factors are the demand and supply of property on the market and interest rates. Interestingly, in the past two recessions, the comparatively richer regions of London and South East house prices have been more sensitive to unemployment and house price changes than the rest of the UK, yet London and the South East also bounced back quicker and higher after the two recessions.
The concept behind this is that more expensive house prices in the South drop more than lower priced houses in the rest of the UK. Why? Because those more expensive regions have, by definition, more expensive house prices meaning the homeowners have higher mortgages, so if they become unemployed, their homes are more likely to be repossessed (because of the high mortgages), and consequently that reduces house prices in that area quicker because repossessed houses tend to sell much more cheaply compared to normal house sales.
The health of the Luton property market in 2021 and beyond really depends on what happens to the economy as a whole and more specifically what is happening in the Luton economy.
When we drill down though, unemployment has hit different sectors of the economy to a lesser or greater extent. For example, for office workers, people who work in tech & sciences and the professional services, the impact on jobs has been comparatively mild, with many personnel able to work from home. Yet for others, such as those who work in the hospitality, leisure, retail, entertainment and catering industry, remote working is simply not an option and these have been hit the hardest.
Unfortunately, the industries mentioned above are the ones that tend to employ the younger generation, who invariably live in private rented accommodation, rather than own their own home. Being made redundant puts their dream of buying their first home back even further as they try and get themselves back on their feet by initially finding a job (let alone save for a deposit).
Housing markets will recover quickest in towns and cities, where jobs are in more resilient employment sectors.
For example, in London, unemployment jumped really quickly (and high) in 2009 with the Credit Crunch, yet came down just as quick in 2011, just as the property market in London started to take off, whilst in Luton, it took a lot longer for unemployment to drop and the Luton property market didn’t really start to get going until 2012.
If we have a determined economic contraction, with a lengthier and leisurely economic recovery, impeded by financial stress, that will lead to much higher unemployment in the 10% to 12% range in the summer of 2021. However, before I get to the initial question, I need to highlight another interesting fact, because…
What is particularly interesting is the increase in unemployment in Luton amongst men has been higher than women, with a growth of 6.3 percentage points for men compared to 4.6 percentage points with women.
So, what is the prediction for the Luton property market under the cloud of this growth in unemployment?
One massive redeeming factor that could just save the Luton property market is low interest rates. This will keep mortgage payments low, meaning repossessions should be kept to a minimum (therefore, there shouldn’t be a flood of cheaply priced Luton properties coming onto the market all at the same time and dragging Luton house prices down with it, as it did in the previous two recessions of 2009 and 1989).
Yet, irrespective of the ultra-low interest rates, I still consider property prices in Luton at Christmas 2021 won’t be much different from today, and in fact could be slightly lower.
This is because people have been paying top dollar in the last six months to secure their dream Luton home, quite often spending the money they saved on Stamp Duty on the purchase price. When Stamp Duty Tax returns in April 2021, there will be less money to pay for the property ... thus Luton property values will be, by implication, lower in a year’s time.
What about Luton landlords and the rents?
Nationally, rents fell just over 2.3% between 2008 and 2010, following the Credit Crunch, while national house prices fell 15.9%. I anticipate Luton rents will also remain comparatively robust in the coming months and years.
Rents are very much tied to the rise and fall of wage growth and I can’t see why this relationship shouldn’t continue. Rents will rise in Luton by between 13% and 15% in the next five years, yet if property prices do rise in 2023/24, that means future rental yields will be marginally lower in 2023/4 comparative to today, especially as ultra-low interest rate expectations (according to the money markets) seem to be here to stay for a long time.
Therefore, something tells me there could be some interesting Luton buy-to-let investment opportunities for Luton investors willing to play the Luton buy-to-Let market for the long term.
To conclude, these are just my personal opinions. If you are a Luton landlord looking for advice and an opinion on what to buy to maximise your returns, please don’t hesitate to contact me. If you are a Luton homeowner, looking to buy or sell and need any advice or an opinion on where the market is and where your Luton home sits in the bigger Luton property market picture – again feel free to drop me a line.
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Roll the clock back to April 2020, and major financial economists and property market commenters were sounding the alarm. The very best-case scenario was a 5% drop in property values by the end of the year, and most were in the 10% to 15% range. They forewarned the Covid-19 stimulated recession would trim tens of thousands of pounds off the value of Luton homes.
Yet the Luton property market seemed not to get the memo on that, and now as we find ourselves at the end of 2020 and the worst of lockdown restrictions appear to be passed, vaccinations on the way and economy starting to grow, Luton property prices seem to be doing quite well.
What happened to the Luton house price crash that wasn't?
Before I answer that, it reminded me of what the Treasury said in 2016 about a leave vote on the Brexit referendum. The considered opinion of the Treasury was house prices would drop by 18% if the Country voted to leave the EU, so let us see what that would have done to Luton house prices if that had taken place and then what exactly has happened in the last four and half years …
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… and the three reasons why it will not be the
catastrophic scenario some are predicting
In the last few months, the Luton (and UK) property market has resisted and flouted every economist’s prediction. With the economy a shadow of its former self, unemployment set to hit 11.9%, the Government on track to borrow nearly half a trillion pounds to pay for Coronavirus support packages etc., all of this has had no effect on Luton homeowner’s enthusiasm or capability to want to move home. It highlights the influence of both the emotional impact of lockdown and the enticing appeal of saving thousands of pounds on your Stamp Duty Tax bill.
For the last few months, the Luton property market has been akin to a surfer, riding an unexpectedly large wave. The question is, will the surfer crash down (i.e. the property market) onto the rocks or will it calmly arrive at the beach unscathed? Well looking at house prices firstly…
UK house prices are 4.7% higher than they were 12 months ago according to the Land Registry, whilst in Luton they are 2.3% lower
Looking at the data over the country, things overall are looking good for property prices. Yet it must be remembered the Land Registry data is on completed house sales and is always a couple of months behind, so this data is for house sales up to September that were agreed in the spring. Also, it does not take into account the prices being paid today on Luton homes (as they will only show in statistics the Spring and Summer of 2021 when the sale completes).
Luton house prices will inevitably ease in 2021
Anecdotal evidence over the last few months has suggested buyers are using their Stamp Duty savings on the price they are prepared to pay for the Luton home of their dreams, so when the Stamp Duty holiday finishes in Spring 2021, we will see a reduction in the price Luton properties sell for, as buyers will now have to hold back some of their cash to pay the Stamp Duty tax.
Mortgage approvals at a 13 year high
A better statistic to judge the property market is by the number of mortgage approvals. As the vast majority of house buyers need a mortgage, that is another good place to look at the numbers as they are much more up to date than the Land Registry figures. The Bank of England recently stated 97,500 mortgages were approved last month, up from the long-term average of just over 65,400 per month. This was the highest number of mortgage approvals since September 2007, and a whole third higher than mortgage approvals in February 2020 when we had the Boris Bounce in the property market.
As a country, we are due to smash through 2019’s 524,000 total number of mortgage approvals this month, despite the fact that the property market was closed for nearly three months in the spring. It’s vital to remember, that mortgage approvals do not equate to people moving home, as many of you reading this can attest to ... property sales do fall through.
I do have apprehensions that many Luton people, buying and selling their Luton homes and in a chain, may not be able to realise the move before the Stamp Duty rules change at the end of March 2021, as there is a massive backlog with mortgage lenders, local authorities’ and the searches, chartered surveyors surveying the property and solicitors with the legal work, all combining to slow down the house selling and buying machine.
If you are in chain at the moment, you must constantly be talking to all the parties involved and ensuring everything is focused on getting the sale complete by the end of March. You have a responsibility to get information requested back in hours, not weeks ... because if you don’t, you might not get your Luton home move through before the end of the Stamp Duty holiday, and without that discount, someone in your chain may pull out of the sale altogether and the chain will break.
The number of people moving home in Luton is anticipated to
drop sharply after the Stamp Duty holiday ends at the end of March 2021
And that is probably going to be the biggest impact on the Luton property market in 2021. Yes, there will be a slight readjustment in the prices paid after March 2021 (as mentioned above) yet, a reduction in the number of people selling their Luton home does not inevitably lead to a house price crash.
Yes, there will be a number of people who have to sell in 2021 because they have lost their jobs (i.e. ‘forced sales’). In the last two ‘Property Market Crashes’ of 1988 and 2008, there were a large number of forced sales in a short period of time (because business owners had to sell their home as their business had gone bankrupt because of the Credit Crunch, as well as people who had lost their job), increasing the supply of properties coming to the market in 1988 and 2008.
This in turn pushed Luton house prices down as the property market was flooded with lots of property to sell in a short period of time. Yet this time, we have had the cushion/parachute of Bounce Back Loans, Furlough and Mortgage Holidays over the last 9 months.
Also, another important factor about the last property market crashes were the levels of interest rates and the amount borrowed.
Interest rates are the key to the future
of the Luton property market
In 1988, mortgage interest rates were an eye watering 11.5% and 6% in 2008, meaning mortgages were much more expensive compared to the 0.1% rate we have today. Also, with 77.2% of mortgagees with fixed rate mortgages, and only 1 in 21 mortgages owing more than 90% of the value of their home (and 1 in 303 mortgagees owing more than 95% of the value of their home), negative equity should not be so much an issue like it was in 1988.
This means most Luton homeowners are in a much better place to weather the storm of 2021, than they were in 1988 and 2008
I foresee many Luton sellers will simply wait until activity in the Luton property market picks up again before placing their property on to the market. This means fewer properties will be placed onto the market for sale in the later part of 2021, meaning Luton house prices will tend to hold up. The people that will be affected by less properties coming onto the market will be estate agents, solicitors and home removals people.
I also believe there will be ‘interesting investment opportunities’ to be had for Luton buy to let in the latter half of 2021 with the potential changes in Capital Gains Tax regulations, although those won’t go on the open market, so do keep your ear to the ground and build relationships with all the letting agents in Luton so you get to hear of the property portfolios coming up for sale (as they tend to sell ‘off market’). Again, if that’s something that interests you – do drop me a line.
So, where is the Luton property market heading in 2021?
Well, the Luton property market (aka our “surfer”) has seen house price growth of 56.8% since 2009 … and this has been fuelled on the back of…
- Ultra-low interest rates mean money is cheap to borrow and so mortgage payments are low. With the Bank of England pumping £150bn into the economy in November with Quantitative Easing (QE) to add to the £725bn they already spent on QE since 2009 – interest rates will continue to stay low for some time.
- There has been an increase in the demand for housing with annual net migration of 214,400 since 2009 (meaning 96,700 additional households per year have been required since 2009 just to house those people – a total of 1,063,700 households).
- The average age of death has risen by 2.1 years since 2008 in the UK. People living longer, delays property from being released back onto the property ladder. For every extra year of life the average Brit lives, an extra 290,850 households are required in the UK.
None of these things have changed because of Covid.
As a country, we have only built on average 165,100 homes a year since 2009. Supply and demand show that whilst we will probably have a turbulent choppy ride on the 2021 wave (because of the economy) our surfer (aka the property market), with long term demand for housing outstripping supply since the 1980’s, will continue to ride the wave (probably not as large as it has been in 2020) as the ultimate long-term outlook for the property market in Luton looks good.
All this means demand for decent, private rented Luton property will be good as long as the property ticks all the boxes of the tenants. If you are a Luton landlord, whether you are a client of mine or not, feel free to drop me a line to pick my brain on the future of the buy to let market in Luton.
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If the proposals were adopted in full, some Luton landlords would pay £10,000 less Capital Gains Tax than they would currently
The government borrowed £394bn this financial year (April ‘20 to April ‘21). This figure does not include the cost of November lockdowns and support measures, which means the final bill will probably be over half a trillion pounds. Ultimately these billions will need to be paid back to cover the cost of Coronavirus.
The Office of Tax Simplification (OTS) published a report for tax reform and, as was predicted by many in the press, the Government Dept suggested the Chancellor contemplate readjusting current Capital Gains Taxation (CGT) rates with a person’s own Income Tax rates. This would mean increasing the rate of CGT for selling a buy to let property from 28% to 40% for high-rate taxpayers and 45% for additional rate taxpayers. To add salt to the wound, the OTS is suggesting cutting the £12,300 annual CGT allowance.
This has led to many Luton buy-to-let landlords contacting me in the last few weeks, wondering if this is the time to exit the Luton buy to let property market, especially as they have been hit by growing levels of rental legislation and higher taxes.
With tax bills about to go through the roof, is this the time to leave the Luton buy to let property market?
Yet, like all things, the devil is in the detail as Luton 2nd homeowners and Luton landlords may well finish up having lower CGT tax bills with these new taxation proposals, even though the CGT restructurings are being introduced to raise the much-needed cash for the Government.
Apart from the suggested cut of the annual CGT allowance and increase in the CGT percentage rates, the OTS report also proposed reintroducing rebasing and indexation. In layman’s terms, the OTS are suggesting all gains made before 2000 would not be taxable (rebasing) and any capital gains would be calibrated to account for inflation.
So, what would that actually look like for a Luton landlord? Let us assume we have a Luton landlord who bought a Luton buy to let property in 2000.
Under the current CGT rules
- The average value of a Luton property in 2000 was £85,400
- Today, that same Luton property has increased in value to £270,300
- Meaning a profit of £184,900
- As our Luton landlord is a high-rate taxpayer (earning £60,000 a year), their CGT bill after the annual allowance would be £48,328
Under the new proposed CGT rules
Under the new proposals, the CGT payable (assuming the CGT rate of 40% and a lower annual allowance of £5,000), the same Luton landlord would only pay £38,608 – a saving of almost £10,000.
And the savings don’t stop there. Remember, under the new OTS proposals, all capital gains made before 2000 would also be tax-free.
However, let us not forget the responsibility of the OTS is to report on tax simplification opportunities, not to set Government taxation policy. None of us have a crystal ball on what Rishi Sunak will do with CGT on buy to let property or second homes. Although, as time has always taught us with investments, often the worse thing to do is to make impulsive decisions on what MAY happen.
You have to remember, CGT only gets charged when you sell or transfer your investments, and most people use their rental investments to provide their income. If you did sell up, the best 90-day building society accounts are obtaining 0.8% pa, the stock market is a rollercoaster (good luck with that) and Government 10-year bonds are paying a princely 0.324% pa … where else are you going to invest to get the income Luton property investments provide?
Property is an asset you can touch, feel and ultimately understand. Maybe, this is the time (if you haven’t already) to take portfolio advice on your Luton buy to let investments? Many Luton landlords do so, whether they use our agency, another Luton agency or you manage your property yourself. The service is free of charge, we don’t need to meet face to face as we can do it over Zoom and it’s all without obligation. I promise to tell you what you need to hear - not what you want to hear ... what do you have to lose?