The COVID-19 pandemic has had a massively detrimental effect on the economies of all countries across the globe. Having successfully recovered from the 2008 economic crisis, the UK is now faced with an even greater financial challenge. In a shrewd, early and positive move, the government has decided to suspend stamp duty on the sale of any property up to the value of £500,000 in a bid to boost the housing market. As this move is valid for only nine months from July 2020, it has resulted in an instant surge in demand for property.

The 2008 financial crisis resulted in massive changes to property purchasing rules

To make it clearer why this is such a boost to the housing market, and especially new builds, one has to look back to the 2008 financial crisis and the knock-on effects it had on the housing market.

One of the major reasons the 2008 financial crisis was so great was as a consequence of excessive borrowing, especially for property purchases. This was made very easy by lending sources, both banks and building societies. Thirty years ago there used to be an accepted rule that as an individual you could borrow up to three-times your gross salary, and two-and-a-half times your joint income if buying with a wife or partner. To begin with lenders were prepared to provide funds up to 95% of the value of the property and over time with a buoyant property market increased to up to 110% of the value.

During 2008

Come 2008 and those rules had flown out of the window. Lenders were prepared to lend up to six-time a person’s gross salary, predominantly because interest rates were so low. There was a very naive and short-sighted approach being made to the property market and easy borrowing did little other than create a false sense of security. When the lending ‘bubble’ first burst on the other side of the Atlantic, it was not long before the UK was also hit. Having had their fingers badly burned, banks and building societies dramatically changed their lending criteria.

Post-2008

After 2008, first-time buyers were hardest hit. While the re-introduction of the stricter lending multiples – three times gross salary – still allowed for a reasonable-size mortgage, it came with a maximum lending of 80% of a property’s value which left many struggling. Especially as, in 2008, the average price of property in London was £245,000. Thus, for first-time buyers, they had to find a cash deposit of £49,000, which had a dramatic effect on the property market for the next 3-4 years.

The chancellor’s temporary removal of stamp duty up to £500,000 was a smart move

In a bid to make things slightly easier, stamp duty for first-time buyers was removed for properties up to £300,000 in value.

In 2019, just prior to the pandemic crisis, the average price of property in London had risen to £485,000. For the UK as a whole, that figure had reached an average of £320,000 in July 2020. Consequently, the elimination of stamp duty for all purchasers, up to a maximum £500,000 makes a huge financial difference. If the purchase price of a property was £500,000, the bill for stamp duty would come to £15,000 if this was the second property. For first-time buyers it would be £10,000.

Today, neither buyer would pay any stamp duty at all, which is tremendous saving and a huge incentive. This appears to be having an immediate effect on the demand for new-build properties, but a lesser demand on older property.

So, what is causing the increase in demand for new-build property?

With the removal of stamp duty for a limited period of time, there are going to be two principal beneficiaries – first-time buyers and those investing in the buy-to-let market. For the former, the saving of up to £15,000 means that it will be easier for them to amass the 20% deposit needed for the purchase of a property. For those who are buying for investment purposes, an immediate saving of £15,000 makes astute financial sense.

Now, that may explain the increase in demand for property from those two buyers, but why is the new-build market benefiting more than older property? Well, one reason is practical, the other is as a consequence of the buying and selling process for existing property owners.

For first-time buyers and investors alike, there is tremendous financial peace of mind that comes with buying a brand-new property. Not only do you get the benefit of a ten-year NHBC warranty that most new builds come with, but you are unlikely to have any major maintenance costs, beyond standard property maintenance, for ten years either.

How does this affect existing homeowners?

Currently, existing homeowners are more interested in keeping a roof over their head rather than changing it. The pandemic has created an atmosphere where job security has all but disappeared for all those employed in anything other than non-essential professions. Thus, the choice of older property for current buyers is restricted. Beyond this, those who are looking to sell also have to buy somewhere, and their choice is also limited. Until they do find somewhere else, they are not going to agree to a sale, or if they do, they are not going to actually sign any contract.

With new-build property, that latter problem simply does not exist. Buying a new-build property is about as hassle free and risk free as it gets.

Demand for skilled bricklayers in London is on the increase

Here at Innovation Brickwork, the increase in demand for newly built property has seen a noticeable increase in demand for brickwork services and bricklaying services in London, but also other counties in the south-east of England. As far as the next nine months are concerned, while there is a stamp duty ‘holiday’ we anticipate a continued increase in that demand. That may well stretch on for several months after the stamp duty holiday ends.

Why the continued demand?

Because property law dictates that a property is deemed to be legally sold once contracts have been exchanged, not when the sale completes. As a result, we can see there being a flourish of contracts being exchanged towards the end of March 2021, with many of those sales relating to property being bought ‘off plan’ – in other words, property that hasn’t even yet been built! With contracts having been exchanged prior to the end of March 2021, even if completion of the sale isn’t until September 2020, there would be no stamp duty to pay if the purchase price was under £500,000.