Focus on the Budget: Inflation – House Prices Direction for the next 5-6 years. Implications of Green Energy & Specifically Solar PV. Stealth Taxes & the “Big Freeze” in Allowances – 07/03/2021

Mar 7, 2021

This week’s Sunday Supplement simply has to be taken over by “Rishi’s Restart” spring budget – but rather than the “vanilla” commentary that you can get from any competent accountant or tax advisor – let’s relate it to the bigger macroeconomic picture, and then to property as well.

The most leaked budget in recent or any memory followed the pattern that this government have liked to use over the past 12 months or so. Leak some info, feel out the reaction – I said this week I genuinely feel they are monitoring the likes, loves and angry faces on the internet to what they are feeding the press, and acting accordingly. I’m not against this at all – it is quite clever to an extent – but do we really want that much of a populist government? Will that really get us to where we need to be? They will of course have to make an awful lot of really unpopular decisions in the near future – how does this fit within that brief?

The hidden message, it won’t surprise you to hear, is inflation. We are looking at inflation, inflation, inflation with Rishi Sunak and Kirstie Allsopp. The trap has been set to catch the tax, once the inflation really gets going, with allowances frozen on almost every tax known to man until 2026. This is obviously taxation by stealth and will bite a lot harder by the time we get to 2024/5 if I, and other commentators, are correct about this secular inflation. It is one thing freezing allowances when the government is limping along as per the early 2010s, but we are looking at the start of an absolute boom here in my view – with lots and lots of help in doing that:

Firstly – the balances that have been built up in savings accounts

Secondly – the household debts that have been paid down in the past 12 months as furlough has meant money in the pocket and closures have meant nowhere to spend it

Thirdly – company balances looking healthy (overall, there are many exceptions of course) with the combination of all of the above being estimated at a quarter of a TRILLION in excess cash available to be spent and/or invested (sums from Andy Haldane, chief economist at the Bank of England)

Not only that, but specific to property – ultra-low interest rates “guaranteed” for years to come, the largest credit expansion in recent times by expanding 95% govt-backed mortgages to everyone, not just first time buyers (affordability remains the challenge, but deposits needed are now halved or “thirded” on the back of this). With a stamp holiday of sorts now going on until September, this is bad news for the large new home developers who have peddled their product above market value on the back of Help to Buy for the best part of a decade – and that will be diluted into the secondary stock. The stage is set.

Remember – consumption is the major driver of our economy – and the forced reduced consumption in 2020 saw GDP down officially by 9.9%. That looks like, with the money pumped into the system (and the big, big difference between this time and 2009-10 stimulus measures is the direct transfer of money into consumer bank accounts via furlough, self-employed grant schemes, grants generally, Covid payments, bounceback loans, etc.), the recipe for an economic boom. Spending begets spending, debt and credit will be easily available and also cheap, wages will pick back up and prices will rise.

All of these things – increasing wages, increasing supply of credit, ultra-low interest rates – all of these are massive positives for house prices. At this point, it is hard not to see a decade of outperformance, and more and more of course becoming priced out of the market.

We should recap though. From 1 Jan 2010 to 31 Dec 2019, 56% of houses in the UK went DOWN in value in real terms. The least quoted stat you ever see by Shelter, Generation rent, or anyone trying to make the case for pricing people out of the market, greedy landlords, etc. etc. This is an unlikely phenomenon to continue ANYWAY – UK property has been a pretty solid inflation hedge over time. This already set a scene for a runaway decade.

Put that alongside the spectre of Corbyn, defeated in Dec 2019 once and for all – the fears over second homes being disproportionately taxed, private property being seized by the state (at the extreme end – don’t think for a second that John McDonnell wasn’t up for it, he absolutely was), etc. – and remember the “Boris Bounce” before Covid totally dominated everything in our lives?

So, if we agree inflation has the perfect recipe, it also has a government very willing to welcome it. It is the most sensible way to sort out this debt mountain created by Covid – that much I would not dispute. But what you will hear me saying as this situation unfolds is that the pursuit of inflation as a chief strategic goal (which I believe it is – I don’t believe it will ever be publicly stated but I believe it absolutely has governmental and central bank focus) is that this is an error that will lead to fallout.

What we need, and what we lost in what may well in many years time become known as the “lost decade” (2010-2019), is productivity growth. GDP growth without this productivity growth is not possible in the long term, and in the lost decade, all we had was a productivity puzzle with job creation not translating into productivity growth, suggesting that the majority of the jobs created were low quality or part-time. This is what needs to be the focus – and the much needed infrastructure investment and “levelling up” efforts from RIshi were of course welcomed, but nowhere near on the level that is required to improve the productivity of workers outside of London. Last year’s budget said £600bn would be invested over the lifetime of this parliament – this is looking more like £60bn at these rates.

Where are the hidden traps, or the hidden nuggets, for the property investors? Well, Capital Gains Tax (CGT) was conspicuous by its absence. That reform may be being saved for later in the year, or may have been shelved – we will find out. Stamp Duty got the extension we all thought was coming – no reform, which I think is a shame, but perhaps will be looked at again later this year or early next on that front. The £125k threshold looks a bit of an insult when comparing to where Wales and Scotland start levying the tax via their devolved systems. We won’t be back there until October of course, but really £250k (or higher) is where it should be starting. Most houses in England still change hands under the £250k level and this is a further blocker to people moving and drags productivity (by providing a geographical barrier) and social mobility as well.

The SDLT holiday will likely not help the typical reader of the supplement, although I am of the mindset that there is an unrelated factor that we might see play out as time goes on this year. IF the unlocking plan goes ahead as advertised/expected that is.

There will be a large swathe of the population of homeowners, who, by definition tend to be more senior in their years, and tend to have taken the threat of the pandemic a lot more seriously than the younger generations. Some of those people will not even have considered putting their house on the market since March last year, regardless of the incentives of the SDLT holiday. Their stock is yet to come to market and will only do so when they feel comfortable. The agents, the investors, the auction houses and the cash buying companies need it to! How many houses is this? It is very difficult to say, but I think it will be a material number.

We also have the supply side shock on the basis of debt pressures being removed or softened to the extreme. When will THIS start to impact again? Well, with furlough until September in its current form (with the 10% contributions reintroduced in July, moving to 20% from employers in August and September), it seems almost certain that the eviction bans in both residential and commercial, repossession amnesties and debt pressure overall will not be returning before then. How will it be introduced? That will be an interesting one, because some form of tapering would be ideal and is how this government seem to be attempting to do this.

This wave of properties released will likely be far fewer than expected, however. We have to put together the massive change in household savings balances, and paydown of household debt, with the likely “storm” of repossessions once predicted in the heat of battle, last year, during lockdown 1.0. It could easily be a damp squib (in resi); commercial is likely a different story, because the non-entrepreneurial may well not survive – although the support for businesses has been reasonable.

I can only gauge somewhat anecdotally by looking at data from within our own operation – of over 400 different tenancies with individuals and organisations, solely on the resi side, we only have one delinquent, whose circumstances have nothing to do with Covid – he is 100% using it as an excuse. Of the dozen or so genuine cases of distress that there have been in the past 12 months, all 12 have either already cleared their arrears or are on a clear payment plan. Given that this incident has hit the poor, the sick and the old the hardest, our experience has been that tenancies have been largely smooth sailing (testament to the bond-style nature of the residential property market, when the property and asset management is done correctly).

Again anecdotally the SDLT holiday extension has spurred people into life – with deals being done at the back end of this week, after people were holding off for some clarity. It takes some of the pressure off the beleaguered conveyancing sector too – or simply extends the execution date! So many transactions are below the 250k level that the 6 months breathing space on that will be welcomed.

One more point of note – the stars seem to be somewhat aligning for Solar PV (Photovoltaic, i.e. generating electricity rather than hot water). We are watching and waiting for a “proper” Green grant scheme with interest, if the government is serious about achieving “C” ratings on EPCs for new tenancies by April 2025. We have the following confluence of circumstances:

Electric Cars requiring a more robust grid and cars having an overnight/nightly power requirement, alongside phasing out of new petrol and diesel by 2030 (2025 according to some manufacturers)
PV being the only major contributor to netting carbon emissions on houses other than EWI (External Wall insulation)

Battery technology continuing to develop

Green Gilts being pursued with an initial raise of £15bn (although this could easily be seen as an excuse to take on even more debt, what’s another £15bn between friends)

Woeful grant schemes in the past with mistakes to be learned from

Zero carbon by 2050 commitment

A strategic want to reduce dependency on natural gas which often comes from regions that would not be considered allies of the UK

The “Super-Deduction” as announced by the chancellor. Solar panels are not 18% deductible as a rule (the rules are more complex – see a proper tax/capital allowances advisor!), they are 6% deductible items – but under Rishi’s super-deduction, this sees a 50% writedown in year 1 rather than a 6% reducing balance.

Renewables appear to offer one of the biggest opportunities to landlords of recent times. Those with positive cashflow businesses will take note. Those without them may well need to sell off pre-April ‘25, which offers further opportunity. I’m sure some have started to crystallise because of CGT murmurs anyway, again I only have anecdotal evidence for that but have seen some of it.

Many investors who have been shepherded into limited companies by section 24 will have been pleased to see corporation tax tapered up only, preserving the 19% at 50k profits and below. With super-deductions etc. for those who make use of capital allowances, and the fact that 70% of businesses in the UK don’t make 50k profit per year – this looks like good news. A carry-back on losses being extended might also help if you have a trading company that hit hard times in the 2020 or 2021 financial year.

It feels incredibly good and positive despite the UK having the largest tax burden it has had now since the 1960s! That is quite an incredible stat. You have to take your hat off to the Treasury, because it doesn’t feel like that. Taxation by stealth!

I will leave you with one further thought. A friend of mine from school days (he was the smartest at school by some distance) messaged me this week. He has worked at the very top level in investment banks/proprietary trading teams, internationally, and now sells world-class research to hedge funds. He basically said “you must be looking forward to the absolute melt up in UK real estate”. For those not familiar with the trading vernacular, he is suggesting that UK property is about to go on an extended bull run with increased pricing. For me, it was the last piece of the jigsaw – I was already thinking that, and to have it ratified by a strong second is fantastic indeed.

In summary I see a strong 5-6 years coming in the UK Resi market; that is not to say there won’t be bumps in the road this year because there still will, and a new stamp cliff exists, tapered or not…..but if the 95% mortgages don’t get much takeup because of affordability and we see rules relaxed based on the “new normal” of zero rates – there may be another mortgage market review and a relaxation based on long fixes for example, 5+ years or 7+/10+ years – that would follow the PRA buy to let affordability checks introduced in 2017, after all, so it wouldn’t be a major stretch – but it would be a major credit expansion which would add yet further fuel to the fire, upwards.

Keep calm and buy houses, folks.