LTV flash crash if stamp duty is hiked
Lenders will drop loan to value levels tomorrow if today’s Budget includes a stamp duty hike to 7% for property purchases over £2m, says the former president of the National Association of Estate Agents.
Trevor Kent said that higher stamp duty always resulted in property price pressure and in that scenario there would be little doubt house prices would fall across the board.
The result would be lenders pulling their products overnight to drop LTVs in order to protect themselves from borrowers falling into negative equity.
He said: “Mortgage lenders rely on the expectation of a gentle long-term rise to safeguard their loans. Their only answer to dropping prices is to lower LTV levels.
“They’ll do that tomorrow in a flash if house purchase costs rise further through government taxation.”
Kent said that the hike to 7% in stamp duty would deliver a near-fatal blow to home sales at all price ranges because of all borrowers’ reliance on property chains to move.
A stamp duty hike to 7% would mean that purchase of a property worth more than £2m would see buyers having to find an extra £40,000 on top of the current £100,000.
He said: “Their seller may be buying at £300,000 and paying £9,000 tax, the next buyer in the chain is paying £600,000 for their home and writing a tax cheque for £24,000, the owner of that home is buying at £1.2m and is already hit with a £60,000 tax shock.
“To then suggest that that the next purchase in the chain will cost the buyer £140,000 of savings to buy at £2m will probably mean no sale and the whole pack of cards collapses and even the £135,000 buyer loses out.”
David Whittaker, managing director of Mortgages for Business, agreed that the stamp duty hike would suffocate the property market.
He said that as proposals went the hike would “do as much for the property market as the guillotine did for the pockets of Marie Antoinette’s wig maker”.
Whittaker said that the government seemed intent on delivering populist measures rather than supporting one of the most crucial elements of the economy and so we shouldn’t be surprised.
And he added: “Apart from the fact this move won’t make the Treasury anywhere near the amount of money they expect or need, it will send shockwaves through the rest of the sales market.
“The prime level of the market has been one of the few parts of the sector functioning well but this hike threatens to sap its energy.
“All it will do is leave buyers in the middle of the ladder sandwiched between the feeble first-time buyer market and a punished prime market. Not a situation we should intentionally be in when the market is in middle of a lacklustre recovery.”
Meanwhile Nicholas Leeming, business development director at Zoopla, called the 7% stamp duty rate “flawed and misguided”.
He said: “The expectation that this new rate will generate £1.5bn is at odds with our research which shows that had this 7% rate been in effect over the last two years, it would only have generated £634m in revenue.”
“With 77% of properties sold over £2m in London this is as much a tax on Londoners as it is on the wealthy.”
Like Kent, Leeming said that the hike would not only affect the wealthy but it is likely to have an adverse impact on the entire property market.
He said: “We’ll likely see a slump in activity from buyers at the top level and this will have a knock-on effect all the way down the chain.”
Figures from Kent revealed that over the past two years there were 2,834 properties sold at £2m or higher. Around 2,115 were sold in London.
Sue Foxley, head of research at Cluttons, said that three and four bedroom family homes in London’s villages would be pushed into the £2m stamp duty tier within a year or two given price growth expectations, making it even harder for families to commit to staying in the city
She said: “There will certainly be a rise in the number of people looking for a renovation project priced beneath £2m, preferring to spend their money on improving their home and potentially getting it back when they sell rather than handing an additional 2% over to the Treasury.”
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