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London house prices leapt at a whopping 11.5 percent year on year in the first quarter of 2016, according to the Nationwide House Price Index, far outstripping the 5.3 percent rise notched up in the U.K. overall. But many industry-watchers fear this may be the final hurrah for the capital's residential real estate for a while thanks to the introduction of a new stamp duty surcharge on second home or buy-to-let property purchases.
As of Friday, anyone buying an additional residential property in England, Wales or Northern Ireland who is not replacing their main residence will pay a flat 3 percent surcharge on top of the current stamp duty – bringing the levy owed on purchases of the most expensive properties to a total 15 percent.
The surge in mortgage and transactional activity highlighted by Nationwide during the first quarter is assumed to partly owe to a stampede to push through purchases before April 1.
Robert Gardner, Chief Economist at Nationwide confirms "Buoyant February lending figures follow on from a January which saw the highest number of mortgage approvals for house purchase since January 2014 - at 74,100. It's likely this increase is partly due to the impending Stamp Duty increase on second homes – and therefore we may see a corresponding fall back in the number of approvals immediately afterwards."
Indeed, the Royal Institute of Chartered Surveyors' Chief Economist , Simon Rubinsohn, agrees, saying: "Results from most recent RICS Residential Market Survey suggest the upward momentum in property transactions will slacken in the wake of the introduction of the tax premium. This is likely to be most visible in London where feedback we have received goes as far as to point to a modest dip in sales volumes over the coming months."
Global real estate investors who own a property outside of the U.K. will also be subject to the buying tax. Given the longstanding appeal of London as a place for foreign investors to park funds, the new tax is widely expected to knock some wind out of the capital's heady price environment. This would align with the government's intent to alleviate the chronic housing shortage for residents in England where home ownership rates languish at their lowest levels since the mid-1980s.
While the measure forms a part of the government's "Five Point Plan" to tackle the housing crisis and make more properties available and affordable to more people, many fear this will hurt those priced out of the housing market as well as the speculators.
Richard Lambert, CEO of the National Landlords Association, warns "the assumption that the stamp duty surcharge will benefit renters and prospective homeowners is naïve because landlords who are forced to sell in the coming months and years are more likely to sell less attractive stock in less desirable areas."
The government's 11th-hour decision not to extend relief to large investors has also augmented concerns financiers will be discouraged from pursuing new build initiatives which would help housing supply shortages.
Melanie Leech, CEO of the British Property Federation shares this concern, saying "The lack of exemption for build to rent investors is a real blow. The government needs to deliver new homes at scale, so it seems counterproductive to bring in measures that will make it more difficult for this to happen."
The surcharge is just one body-blow in a sustained series of attacks on landlords and purchasers announced by the U.K. Chancellor George Osborne since he restructured stamp duty to a format that penalised buyers of more expensive properties in the Autumn 2014 budget.
Other initiatives include changes to the "wear-and-tear" allowance which also kick in today and next April's elimination of mortgage interest tax deductibility. Separately, the Bank of England announced earlier this week it would recommend higher minimum standards for lending to small landlords who want to buy property to let out.
Time will tell who the winners are – beyond the government who has said it hopes to raise nearly £1 billion from the surcharge by 2021.
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