The Property Market May Need Further Relief to Survive post-COVID

By Jamie Johnson, CEO of FJP Investment

At time of writing, the UK has been adhering to stringent social distancing measures for four weeks. Although a number of department stores, high-street shops and airlines are in danger of entering into administration – as of yet the Government’s economic relief measures have stopped any industry from entering into a financial freefall for the time being.

Homeowners paying off mortgages have been offered substantial relief in the form of a three-month mortgage holiday – easing some of the financial pressures caused by COVID-19.

But many of these initial measures were introduced back when the government still hoped that restrictions could be lifted after just three weeks. As the reality of the situation sets in and England’s chief medical officer Chris Whitty discusses the possibility of a UK lockdown until December, many in the finance and property markets are concerned. Is enough action being taken to support the property market?

Jamie Johnson

The lack of clarity over when the lockdown is expected to end compounds this problem. Property is especially vulnerable to this as an asset class as, although the Government has assured investors that they can purchase property when no one is physically moving residence, the length of time transactions take mean there’s more time for uncertainty to fester.

To minimise their risk exposure, some large banks have temporary frozen their mortgage products. Sellers are also taking their properties off the market given there is a reduced number of active buyers on the market. This will undoubtedly supress property prices, as was confirmed with Rightmove’s April 2020 House Price Index; which measured a 0.2% decline over the last month.

There is nothing to suggest, however, that the demand for property has disappeared. The extremely strong beginning to the year, fuelled the Conservative party’s victory in the 2019 General Election in December, showed that buyers will take advantage of property opportunities in the right market conditions. But how quickly will this demand translate into a renewed increase in transactions once current lockdown restrictions are lifted?

Action is needed

Convincing buyers that they will be financially secure when purchasing a new property post-lockdown may prove tricky. Those who were in the middle of purchasing a property when COVID-19 arrived might understandably be hesitant about beginning a new sale.

The fact that UK house prices are still set to increase significantly over the long-term, with Savills forecasting a 15% increase by 2024, is positive news. There is a chance that this figure could be revised depending on when the pandemic is resolved. So, what can be done to spark confidence in the property market post-COVID should demand not immediately return?

Industry bodies like NFB and RICS are advocating for a Stamp Duty holiday. Such a policy would mean buyers are exempt from paying this tax after they’ve completed on a property transaction.

Such a measure proved successful when it was introduced after the 1992 UK property downturn, where it effectively doubled the number of home sales. This had a similar effect on house sales when introduced in the aftermath of the global financial crisis. Based on these historical experiences, the introduction of a Stamp Duty holiday could facilitate a speedy recovery for the market.

Naturally, the specifics of such a tax relief measure would have to be discussed in full. For example, would buy-to-let investors be covered? And how long would the policy be active for?

Do we need a Stamp Duty holiday or permanent reform?

Many were expecting Stamp Duty to be heavily reformed in Boris Johnson’s first budget as Prime Minister, yet only a 2% surcharge for international buyers was formally announced. Instead, the Government used the 2020 Spring Budget as an opportunity to announce the relief it would be offering businesses and consumers who are being affected by COVID-19.

Should cases increase and lockdown measures continue for the summer, the Government will naturally need to revisit its relief schemes so that ample support is provided for businesses, consumers and investors. At this point, it might be worth considering an extension of the mortgage relief holiday and the introduction of a Stamp Duty holiday as well.

If not, the Government could introduce Stamp Duty reforms in the 2020 Autumn Budget, around when social distancing measures may finally be loosened. This will allow the Government to follow through on promises made late last year and permanently transform the tax so that homebuyers can take full advantage of the real estate opportunities on offer.