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In recent years the Government has made significant reforms to the property market, however, they do not always have the intended impact.
In 2014 the Government overhauled the stamp duty system in a bid to make it fairer while maintaining revenues for the Exchequer, but recent analysis has shown it has earned the Treasury only half as much as expected. Worryingly, it has resulted in a slowdown in sales of high-value homes.
Calculations by Oxford Economics found that the reforms led to 1,950 fewer sales of homes worth more than £1 million last year than expected, and has made the Treasury £370 million less than the £700 million it forecasted.
In December 2014 the Government replaced the previous stamp duty thresholds. Under the old system, stamp duty was charged on properties purchased at £125,001 and upwards at a rate of 1 per cent, jumping to 3 per cent on properties bought at £250,001 and above. The percentage charge increased at different tiers up to a maximum of 7 per cent for properties costing over £2m.
Critics of the old system said it distorted prices because at each threshold the higher rate would be charged on the whole value of the property rather than just the amount falling under the higher threshold. So, for example, someone buying a home for £250,000 would have paid £2,500, or 1 per cent. But if the price was £1 more, they would pay an extra £5,000, as the 3 per cent would be charged on the whole purchase price.
Under the reformed system, someone buying a house for £200,000 pays nothing on the first £125,000, and then 2 per cent of the next £75,000, giving them a bill of £1,500. Previously they would have paid 1 per cent on the total purchase price, giving them a bill of £2,000.
The new system meant reduced costs for those buying homes priced up to £937,500 but triggered a 10 per cent rise in transaction costs for properties valued at more than £1 million.
The research by Oxford Economics suggests the stamp duty changes have cost the economy nearly £1 billion because of the drop in the number of homes being sold and the knock-on effect on services like removals and renovations. The consultancy argues the reforms have indirectly led to the loss of 14,000 jobs. Not to mention the effect that reduced supply could be having on house prices.
Property experts have argued that the Government’s latest measure to abolish lettings agent fees for tenants could also fall victim to the law of unintended consequences and actually push up rental costs.
The buy-to-let sector has already been hit by a higher stamp duty rate for second homes, higher mortgage costs and a reduction on tax relief on mortgage interest, which are likely to result in some landlords leaving the market while others do anything they can to recoup profits.
Private Finance managing director Simon Checkley says: “When the landlord markets the property clearly there are a number of costs associated with taking on new tenants.
“Normally those are born by the tenant as part of the referencing process.
“If it’s not going to be lawful to charge the tenant the administration costs, it is going to fall back on to the landlord at a time when they are earning a lower rental yield and will be doing anything they can to cut costs and increase income.
Checkley adds: “As some landlords begin selling their portfolios, it is reasonable to assume there will be fewer properties to rent, which will put rental prices up.
“Landlords won’t be able to put their rents up if there is a plentiful supply of rental property, but if there is a reducing supply they will have that opportunity and they will be looking to take advantage of it.”