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The impact of the Stamp Duty surcharge on the London rental sector

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With the dominance of the Omicron variant, the London lettings market may well feel an impact in the short-term, but how will demand be affected over the long-term? Our Mortgages Managing Director, Richard Rowntree, shares his thoughts.

The work from home order from the Government is unlikely to lead to the same pictures of empty streets as it did in the first lockdown, but will it put the brakes on the strong recovery of the London rental market?

In the short-term it may well have an impact, but over the long-term I would expect demand to return to the levels we have seen in the past few months. Of more concern to the London lettings market, I would argue, are changes to tax policy.

London's lettings market has been resurgent - tenants have returned in large numbers as work and nightlife reopened. There has been a buzz around the capital again and it was nice to see bars and restaurants busy and theatres full.

According to Hometrack data, new tenancies agreed in London during the third quarter of the year were 50% above the five-year average. This growth in demand is reflected in increased rents, up 5% in central areas compared with last year and up 1.6% in outer areas.

The third and early fourth quarter is traditionally a busy time in the London rental market. University students return and graduates take their first steps on the jobs ladder, whilst those moving for other purposes generally like to do so before the Christmas rush starts. This year, people returning to the capital after living with parents or returning to their home countries have added to the demand for rented property.

The transience and complexity of the London rental market means it is more sensitive to economic or political changes than any other city in the UK. For example, rents in the capital declined in the wake of the Brexit vote, even though tenant demand remained unchanged. Coronavirus has added another dimension to that complexity.

One area the market it has been particularly sensitive to is Stamp Duty. The introduction of the 3% Stamp Duty surcharge in April 2016 led to a significant decline in new buy-to-let purchase of London property.

The number of new buy-to-let homes purchased in London was 58% lower in 2019 than in 2015, the final year before the surcharge was introduced. This decrease was more pronounced than any other market in the country.

Conversely, when the Stamp Duty holiday was introduced, purchases soared again. Comparing the period when landlords received the full 3% Stamp Duty discount - July 2020 to June 2021 - with the last comparative period not impacted by Covid - July 2018 to June 2019 - showed the number of buy-to-let purchases increased by 52% in the capital.

Despite this growth, transaction levels remain 30% lower than 2015 levels and the availability of property to let amongst London lettings agents is at record lows, having been in general decline since 2016, according to data from Hometrack.

Hometrack's data showed that available lettings surged at the start of coronavirus as the market became flooded with short-term lets moving into the long-term rental sector as tourism died. However, as those properties have returned to the short-term market and strong tenant demand has led to good quality lettings being snapped up, stock availability has become a major issue.

Whilst the latest Government orders may temper tenant demand in the capital in the short-term, the bigger picture is worrying if stock levels remain subdued. A long-term constraint on supply will likely lead to accelerated rental inflation in the coming months and years, as well as poorer choice for tenants.

There was a mooted increase in the Stamp Duty surcharge to 4% following the recent Budget. Although HM Treasury was quick to highlight the figure published in an Office for Budget Responsibility report was a mistake, it must have formed part of the Government's thinking.

Additionally, London Mayor Sadiq Khan has raised the prospect of rent controls on a number of occasions and whilst this sabre rattling may play well into the hands of the electorate, in reality rent controls have historically resulted in the opposite happening. Landlords typically respond by exiting the sector, reducing stock, whilst rents levitate towards the upper end of the rent control ceiling, causing unnecessary inflation.

Given the uncertainties surrounding the market and the impact of the initial Stamp Duty surcharge, landlords in the capital need some political and fiscal stability.

Richard Rowntree
Managing Director for Mortgages

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