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Expat Briefing Editorial Team
30 June, 2014
Soaring house prices and tougher mortgage rules may be making it ever harder for first-time buyers to get a foothold on the UK housing ladder, but for overseas buyers with substantial deposits and easier access to finance there remain good opportunities to get a piece of the housing boom.
Prices Surge Ahead
Many analysts warn that the current housing boom will inexorably go the way of previous ones i.e bust. Predicting when the market will peak is a notoriously difficult endeavour, however. Much will depend on how the market reacts to the new mortgage selling rules and the moment when the Bank of England finally decides to raise interest rates, an event which looks to be coming sooner than thought. For the foreseeable future at least, however, the market is likely to remain buoyant, as recent house price statistics suggest.
The latest data from Land Registry's House Price Index, released on June 27, 2014, shows an annual price increase of 6.7 percent between May 2013 and May 2014, which takes the average property value in England and Wales to £172,035. The monthly change from April to May 2014 shows an increase of 0.4 per cent.
However, the headline figures hide what is essentially a two-speed market, with house prices in London and the South East of England motoring along, while prices in the remainder of the country remain somewhat more subdued, especially in the North.
In the South East, prices increased 8.4% over the twelve-month period to the end of May 2014 to an average price of GBP226,334. This was the joint second-fastest increase along with the East of England. London however, continues to dwarf all other regions, with prices rising in the capital by an astonishing 18.5% over the period under review. The average price of a home in London now stands at GBP439,719. By contrast, investors and owners in the North East of England have seen their capital appreciate by just 0.9% over the year, with the North West not faring much better at 1.3%. Indeed, prices in five regions, including the West Midlands, the North and Wales, actually fell between April and May 2014.
Where and What to Buy as an Expat
If you are hoping for strong capital appreciation, there really is no contest given the above figures. It has to be London, or the prosperous commuter belt surrounding the capital.
Crystal Palace-based estate agent James Gough of Martin and Co certainly has no doubts that the southern part of the Greater London area is the place to buy, with the Crystal Place, Norwood and Gipsy Hill areas of South East London all showing strong growth off the back of consistent demand.
However, while there are now more buyers to support rising prices, the new mortgage regulations introduced in April 2014 have certainly had an effect on domestic buyers thinks specialist international mortgage brokers Offshoreonline.org.
Tim Harvey, managing director notes that “UK buyers are now having to provide far more detail on their income and expenditure, which is slowing the process for those at the margins of affordability. Expatriate buyers on the other hand tend to be less clustered at the margins – with healthy tax free incomes, many can simply increase their deposit if required, something which the UK buyer has struggled with historically.”
The slowing of demand amongst UK based buyers which many are now forecasting means that the popularity of renting is unlikely to fall, so for the expatriate buy-to-let investor, now could be a good time to look again at the market. Expatriate property search consultants Expatfindaproperty.com’s Erica Evans notes that landlords owning three and four bed homes in areas near good schools may be better off targeting families for a more stable, longer term tenancy, rather than professional sharers, as some lenders are now starting to impose conditions on “homes of multiple occupation” with four bedrooms or more.
Spotting the next property hot spot is something of an art rather than a science, believes Gough, but he has these tips. “Look for areas with the right housing stock. The Victorian villas of Crystal Palace are beautiful family homes and make for conversions that are full of character. Good transport links are important, but so obviously are relatively low prices. Local points of interest are of course vital in helping to build a community feel. In Crystal Palace people buy because they love the area, it has its own feel and an agenda of localism seems to exist which attracts people to an already diverse and active community. Every hot spot is different, some are subtle differences, others more extreme as they develop on a different set of driving factors.”
Offshoreonline.org expects demand for international sterling fixed rate mortgages to rise amongst overseas buyers of UK property after UK Bank of England Governor Mark Carney gave his strongest hint yet that the UK Base Rate could rise this year – much earlier than even the financial markets had expected.
With UK two-year buy-to-let variable interest rates ranging from 4.24% to just over 5%, but two-year fixed rate funding available at just 5.14%, the decision looks an easy one for most expatriates, thinks Harvey.
“For those with a 25% deposit, there is just 0.01% difference between opting for the security of a fixed rate as opposed to chancing the fact that UK Base Rate will not rise within two years. Most people now believe that UK Base Rate will rise within 10 – 14 months, meaning variable rate loans will all be pushed upwards by similar amounts. Faced with this choice, two-year fixed rate funding looks extremely attractive at present.”
At the same time, brokers are noting a slowdown in UK mortgage main home purchase applications, as the new Mortgage Market Review rules begin to bite. Furthermore, at least two major banks have recently announced caps of four times salary on selected loan applications, following comments from the UK Regulator suggesting additional limits were needed over and above affordability limits.
“We are now seeing confusion in the areas of main home loan applications,” Harvey observes. “Lenders are implementing far stricter checks on affordability and stress testing notional mortgage rates at up to 7%, something which has led to a slowing and reduction of approvals. At the same time, some lenders such as Lloyds and Royal Bank of Scotland, owners of Nat West, have introduced caps of four times salary on some larger loan applications.”
This new dual approach to limiting lending is likely to become more widespread next year, as the Bank of England is given formal powers to be able to instruct banks to implement caps similar to those operated by Lloyds and Nat West at present. However, it must be remembered that International UK mortgages for expatriates hoping to build a buy-to-let portfolio are unaffected by the majority of these changes, as buy-to-let loans are not caught by the new rules (please see our Expat Briefing feature on the Mortgage Market Review for further details of the new UK mortgage rules).
In addition to more stringent application mortgage rules, another weapon that the Government is using to dampen the market is tax, with new measures aimed particularly at wealthy foreign cash buyers, a group said to be driving the market in London and the South East.
Previously called the Annual Residential Property Tax, the Annual Tax on Enveloped Dwellings (ATED) was first announced in the 2012 Budget and is designed to deter “non-natural persons”, i.e. companies, from being used as “corporate envelopes” to avoid Stamp Duty Land Tax, payable when a property is purchased in the UK, at a level dependent on the property’s value.
In force since April 1, 2013, the ATED applies to dwellings situated in the UK valued at more than GBP2m on April 1, 2012 and owned completely or partly by a company, a partnership where one of the partners is a company, or a collective investment vehicle, for example, a unit trust or an open ended investment company.
Relief from the ATED is available for working farmhouses and exemptions for properties open to the public and for those either owned by or held on behalf of charities.
In tandem with the ATED, the government has also increased the rate of SDLT for enveloped properties to 15% and extended the capital gains tax regime to include the disposal of UK residential property by non-resident, non-natural persons for more than GBP2m (see our previous Expat Briefing feature on new UK property taxes for more detail on these measures).
However, the higher tax on residential properties acquired by businesses worth over GBP2m was expanded to properties worth more than GBP500,000 in the 2014 Budget, announced in February. The new lower threshold will apply in terms of the 15% SDLT rate on transactions where the date of completion is on or after 20 March 2014. The threshold above which the ATED applies will fall to GBP1m in April 2015 and GBP500,000 in April 2016.
Commenting on HMRC's consultation on the implementation of a Capital Gains Tax charge on non-residents, which closed on June 20, 2014, Rosalind Rowe, PwC real estate partner and head of PwC's regional tax network, said: "With the ending of the consultation, overseas investors and UK households are waiting to see what legislation will be introduced for 2015".
"There are significant difficulties with the complex interaction of ATED and the tax on the disposal of residential properties by non-residents. The ATED regime applies an annual charge, a
higher rate of Stamp Duty Land Tax (SDLT) and tax on capital gains on disposal of residential properties (up to 28%) with a value exceeding £2m at 6 April 2012 (where the property does not qualify under any of the ATED exemptions). These charges do not apply to residential property let or being developed for sale”.
"The Government will need to look carefully at how the new rules interact with existing rules. There is a danger that they will become more complex and increase the risk of errors in tax reporting”.
Rowe also warned that an unexpected consequence of the new regime will be the impact on UK households that own two properties.
“Since 1965, individuals, married couples and, recently, civil partners have been able to elect which of their homes should be regarded as their main residence given any gain is not taxed if sold. A practical and pragmatic provision, it has worked well and avoids the necessity particularly for married couples and civil partners to keep detailed records".
Deputy Prime Minister Nick Clegg’s pet project, the much-maligned mansion tax proposal, has also resurfaced in recent days, after his Liberal Democrat party said that it would ask those with the broadest shoulders to make additional contributions, if it is re-elected either independently or as part of another Coalition Government.
Clegg stressed that the Liberal Democrats would push for a levy that extends new tax bands to higher value properties. He pointed in particular to the plans recently laid out by the Treasury Secretary Danny Alexander.
Further details of the proposed annual charges are expected to be released ahead of 2015's general election, but Clegg insists that those properties valued below GBP2m would not be hit.
However, David Whiscombe of the UK200Group, a representative body of the accountancy and legal profession warned that there are “two very obvious flaws” with a mansion tax.
“The first is that it is merely a wealth tax: and if you're going to have a wealth tax (itself a big if), it needs to apply to all wealth, not just very limited forms of wealth. If there's one thing worse than a wealth tax, it's a selective wealth tax”, Whiscombe observed.
"Secondly, what about the obvious case of Mr Smith, who owns a single property worth GBP2m, compared with Mr Jones, who has his main home worth GBP800,000, his country cottage worth GBP700,000, and his place by the seaside worth GBP500,000. Are you really going to impose a mansion tax charge on Mr Smith but not Mr Jones?", he asked.
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