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Why the property market could be in trouble after the 2015 election
Britain’s booming housing market looks likely to face a tougher time next year. Matthew Partridge looks at what’s on the horizon for house prices.
If there was one winner from the Budget, it seems to have been property.
Chancellor George Osborne has extended part of the Help to Buy' scheme all the way until 2020.
No wonder. He wants to be as sure as he can that the current property bubble (or recovery, depending on which part of the UK you're in) lasts until the general election in May.
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You see, Help to Buy' comes in two parts, and the extension does not apply to the most aggressive part of the scheme.
On top of that, Osborne also announced a sting in the tail that could hit central London property hard
Help to Buy a scheme of two halves
It easy to forget that the Help to Buy scheme is divided into two parts.
Both allow a buyer to secure a mortgage with as little as a 5% deposit. But they operate in very different ways.
The first part targets only those who want to buy a new-build house. In this case the government gives them a 20% home equity loan, which is interest-free for the first five years.
Effectively, the government owns a chunk of your house. So if you sell up, or want to buy back the government's stake, the price will reflect the value of the house at that point.
In other words, if you bought a house at £200,000 with a £40,000 loan from the government, and the price rose to £300,000, you would have to pay £60,000 to get full ownership.
We don't think it's a good idea for the government to be putting taxpayers' money on the line in the housing market. But at least this only applies to new builds. And at least the taxpayer is exposed to the upside too.
In contrast, the second part of Help to Buy is much more dangerous.
Firstly, it applies to all homes under £600,000, not just new build. So it doesn't directly encourage any new supply, but it does increase demand by enabling people to pay more.
Another flaw is the way in which it is structured. The government ie the taxpayer underwrites part of the mortgage equivalent to 20% of the home's value. This guarantee means that banks can feel comfortable writing a 95% mortgage loan for a borrower, because in reality they are only taking the risk of a 75% loan.
So while the taxpayer takes the hit first if prices fall and the homebuyer defaults on their loan, we don't get any profits if property prices rise.
The shape of the post-election property market
The key point is that Osborne has only pledged to keep the first part of the scheme running until 2020. He could reduce or even scrap the second part.
He probably won't until after May's election. And of course, the Conservatives may not win this election.
However, Labour appears even more sceptical of the scheme. Shadow chancellor Ed Balls has argued in the Evening Standard that "the taxpayer should not be guaranteeing mortgages on homes worth as much as £600,000". So it seems likely that the second part of Help to Buy at least is on borrowed time.
Meanwhile, all the talk now is of boosting supply of homes. The decision to build a 15,000 home garden city' in Ebbsfleet may be a rehash of an old idea, but it does show that the debate is shifting to a focus on more building.
Rising supply or a dip in demand (due to the second part of Help to Buy being scrapped) could help slow the market.
The rise of ghost gazumping'
But there could be a more direct impact on the bubbliest of all the UK property markets London. Almost every day we see a new piece of evidence that the market in the capital is completely out of control.
According to the FT, the latest fad is for ghost gazumping'. Normal gazumping' is where the seller accepts an offer, only for a third party to gatecrash the deal at the last minute by offering more.
While this process is legal in most of the UK (the system is different in Scotland), it's an extremely risky stunt to pull, as the whole deal can collapse in a riot of recriminations.
Yet under the new twist, estate agents are ringing sellers, and persuading them to re-list their homes at a higher price, even when there is no specific buyer available.
The fact that they are even able to convince some homeowners to forget the bird in the hand in favour of the two in the bush, reflects just how rapidly price expectations have shifted in a very short space of time and the extent to which this is a sellers' market.
But Osborne did announce one measure that could end up being a turning point. Until now, non-resident owners have been exempt from capital gains tax (CGT), just as your primary residence is exempt.
Combined with the eurozone crisis, and many other crises, this has made London properties, particularly prime ones, attractive as safe havens' for foreign money. Hence all the complaints about oligarchs of various nationalities buying up central London districts and leaving them as upmarket ghost towns'.
But under the new system, which kicks in next April, just before the election, this exemption will end. As Athena Advisors points out, this makes London property less attractive than the likes of France (which also has CGT, but reduces the rate depending on how long you hold an asset for).
Given that there's a growing irritation with the high price of property in the UK, we may even be reaching a tipping point where campaigning for lower prices becomes a net vote winner, rather than loser.
In any case, with interest rates also likely to rise after the next election (if not before), the housing market will face a tougher time next year. While that may not be such a problem for the cheaper UK markets, it could well be enough to stick a pin in the already over-priced London market.
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