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A survey released yesterday by the Royal Institution of Chartered Surveyors suggests conditions in the housing market are just getting worse. New buyer enquiries fell for the tenth month in a row in September. Meanwhile, 14.6% more chartered surveyors reported a fall in house prices than saw a rise, the worst reading since September 2005.
With buy-to-let investors currently the most important aspect of the housing market – after all, they’ve pretty much replaced first-time buyers as the new blood propping up the market – a lot of attention is on how they will move in the coming months.
So how will the new capital gains tax changes affect buy-to-let?
“Second home and buy-to-let tax gift” was the Evening Standard reaction to news that capital gains tax (CGT) will be changed to a flat 18% from April 2008.
This is pretty much unequivocally good news for property investors. Some have suggested that the change may lead to some long-term buy-to-let investors selling up before April rolls around, as taper relief (which means you pay less CGT, the longer you hold the asset) and inflation indexing (you don’t really need to know the details – CGT is – or was – a horrendously complicated tax) are going to be scrapped too.
But Lorna Bourke on Citywire points out that even buy-to-let investors who have held their properties for as much as ten years will still not be much better off by rushing to sell now. And if someone has been sitting on their investment property for that length of time, I’m not sure they’ll be in any hurry to sell it anyway.
The coming UK property crash – and how to avoid it
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So from April, most people selling an investment property (or second home), will receive a substantially larger sum from the sale than they would now. Good news indeed. So is this some underhand crafty attempt by the government to prop up the property market by encouraging further investors to pile in?
Well, I don’t think so. The people who have been piling into buy-to-let in recent months are driven by herd speculation – they’ve seen property prices soar over the past ten years and now can’t grasp that they will ever fall. The most basic calculation to make before you buy an investment property is to check that your rental income will exceed your mortgage interest payment costs by a profitable margin. Yet many amateur landlords are now subsidising their tenant’s rent.
If they haven’t done the sums on their rental income, what are the chances that they’ve paid any thought at all to their potential capital gains tax liability? Absolutely zero, I reckon.
Certainly, after April, any buy-to-let investors who sell will garner more profit. Some might imagine that this would be recycled into more property. But that misses a vital point. Unlike owner-occupiers, there’s really only one reason for buy-to-let investors to start selling – and that’s if house prices are falling. So the last thing that anyone bailing out of the market will want to do, is put the proceeds back into another house.
And the other key point about CGT of course, is that you have to make a profit to be liable to pay it. Anyone who bought a buy-to-let property over the last two years – and certainly in the first half of this year – might find they’re lucky to break even, let alone breach their annual CGT allowance of £9,200. Particularly if they bought one of the glut of city centre apartments that have been thrown up by developers in recent years, and are now increasingly appearing at repossession auctions at huge double-digit discounts.
You can find out why buy-to-let investors are just like sub-prime borrowers in the US in our recent cover story on the UK’s subprime problem: Stand by for a British subprime crunch. You’ll probably be interested in our recent property RoundTable too – one of the most heated discussions the office has seen for quite some time – which you can read here: Stand by for a British subprime crunch.
Turning to the wider markets…
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London’s FTSE 100 was saved from ending yesterday in the red by a late rally in the mining sector. Good gains for the likes of Xstrata, Kazakhmys and Antofagasta, prompted by higher metals prices and an ‘overweight’ stance from broker Credit Suisse, saw the blue-chip index add 17 points to close at 6,633, having fallen to a low of 6,587 in intra-day trade. However, Northern Rock was the day’s stand-out performer, adding a further 32% on reports that City trader Jon Wood has bought a significant stake in the bank. For a full market report, see: London market close.
Across the Channel, the Paris CAC-40 fell 23 points to end the day at 5,838. And the Frankfurt DAX-30 was up 6 points, at 7,986.
On Wall Street, stocks gave up much of Tuesday’s record gains on Wednesday. The Dow Jones fell 86 points to close at 14,078, with aircraft-maker Boeing weighing heavily on reports that delivery of its Dreamliner jet will be delayed. However, it was a good day for tech stocks: the Nasdaq hit its highest level since early 2001 – 2,813 – in intra-day trading and ended the day at 2,811, an overall gain of 7 points. The S&P 500 was down 2 points, at 1,562.
In Asia, energy and shipping stocks led the Japanese Nikkei up 281 points to 17,458. And in Hong Kong, the Hang Seng was last trading at 29,133, s 563-point gain.
Crude oil had risen to $81.66 in New York this morning, whilst Brent spot was up to $79.12.
Spot gold hit a new 28-year high of $747.70 today, before fallingg back to $747.40.
In the currency markets, the pound was trading at $2.0387 against the dollar and 1.4360 against the euro today. And the dollar was at 0.7041 against the euro and 117.23 against the Japanese yen.
And in London this morning, suggestions that Vodafone chairman Arun Sarin could be about to resign received a positive reception in the City. Shares in the telecoms stock had risen by as much as 2.5% in early trade.
And our recommended articles for today…
Bernanke, Greenspan and the hubris of central bankers
– Christopher Westley of the Mises Institute takes a sideways look at the extreme self-confidence with which both the current and former Fed chairmen have evaded blame for the subprime debacle. For more on the central bankers’ own views on the subprime crisis, click here: Bernanke, Greenspan and the hubris of central bankers
Is it time to get back into tech?
– Not so long ago, beaten-up tech stocks looked finished forever. But, say Eoin Gleeson and Tim Bennett, they said that about the lightbulb and the railway… For more on how a new wave of internet infrastructure is creating opportunities for investors, click here to read this MoneyWeek article – just available to non-subscribers: Is is time to get back into tech?