After months of playing down the prospect of an extension to the stamp tax holiday for property sales of up to £500,000, UK Chancellor Rishi Sunak ultimately opted for a bold new set of stimulus measures for the British housing sector in the 2021 budget unveiled earlier this month. In addition to a three month extension to the stamp tax holiday, originally meant to expire 31 March but now running until the end of June, followed by an additional three months of exemptions on some sales to ensure a “smooth transition back to normal,” the Chancellor is now also rolling out a mortgage guarantee for home loans at 5% deposit.
Survey findings from the Royal Institution of Chartered Surveyors (RICS) suggest the measures come not a moment too soon. Though the housing sector showed strong numbers after lockdown measures were lifted last May, pushing the market to a six-year high, UK lenders all but ensured the recovery would not last by restricting access to mortgages. Coming out of the first lockdown, British banks reduced fixed-rate two and five-year mortgage deals at 95% Loan to Value (LTV) down from 105 to just 15 – with record high repayment fees attached.
As such, after a rush of real estate activity followed the first two months of lockdown and prompted predictions of a real estate recovery in the second half of last year, a dropoff over the first two months of 2021 demonstrated the need for realistic expectations in a pandemic-era economy. RICS found a 29% drop in buyer enquiries in January and a further (if more moderate) 9% decline in February, with surveyors seeing fewer properties going on the market. In sharp contrast to last year’s post-lockdown optimism, many housing market analysts predicted a bearish 2021 before Sunak’s latest announcements – even as real estate agents like Savills reacted to the new budget with fresh predictions of booming prices to come.
Above all else, the outsized impact of Sunak’s interventions on an unstable housing sector points to the important role the UK government has played in mitigating the impact of the pandemic on homebuyers and sellers over the past year. That reality is feeding calls for expanded government action, beyond mortgage schemes and tax holidays, to stabilise the real estate sector and support the individuals trying to take part in it – particularly in England, where the unique ‘property chain’ structure of transactions has left many families in difficult financial straits.
As Beth Rudolf of the UK Conveyancing Association told EuReporter: “Government should have mandated improvements to the home moving process so that transactions would not take 22 weeks on average. They have everything at their fingertips with [the] regulation of property agents, Law Commission reports on leasehold, and the solutions developed by the Home Buying and Selling Group set up to support the Ministry, but unfortunately there appears to be a belief in certain parts of Government that mandatory regulation is not the answer. We believe that is exactly what is required, because voluntary delivery of change by solicitors and estate agents will not go anywhere near far enough.”
One of the most effective potential measures for buttressing the housing market in the midst of an unpredictable health crisis could be the ‘Covid clauses’ recommended by real estate professionals after the pandemic disrupted thousands of transactions last year. With Covid-19 exposing fundamental flaws with the property chain system, could such clauses offer the Government a first step on the path to more fundamental industry reform?
Repeated shocks to buyers and sellers dampen demand
The Chancellor’s about-face on the original 31 March deadline for the waiver of stamp duty reflects a shift in the Government’s own view of its responsibilities. While the original break led to an increase in house purchases in the latter half of 2020, families attempting to buy in the first weeks of this year faced what the BBC calls “a race to beat the tax deadline,” as the government-driven surge in demand produced delays among surveyors, estate agents, and other real estate professionals. Despite the risk posed to hundreds of thousands of transactions at the ‘cliff’s edge’, and an intense campaign by homebuyers and real estate associations to secure an extension, the Chancellor had repeatedly refused to push back the deadline before the extension finally became part of the new budget.
The experience of the stamp tax holiday, and of the homebuyers who stood to lose tens of thousands of pounds if they failed to complete their purchases before its expiry, echoed the traumatic experiences of thousands of prospective homebuyers and sellers caught up in the first lockdown just under a year ago. As a result of the initial 2020 lockdown, during which the real estate sector was forcibly closed alongside the rest of the economy, a survey by Butterfield found three in ten would-be buyers who had secured ‘mortgages-in-principle’ (MIP) had the rug pulled out from under their feet, losing their exchange deposit as a result of the shutdown coming into effect after the exchange of housing contracts.
The unique nature of the real estate market in England, structured on the basis of ‘chains’ linking together multiple transactions, makes English homebuyers and sellers particularly susceptible to the impact of shocks such as Covid. Buyers who find themselves in the middle of a broken chain, in which their own buyer is no longer able to complete a purchase, are not entitled to recoup the deposit they owe the seller in their further transaction. As one mortgage broker explained to the Times: “[Deposit] agreements in principle are not legally binding. You would hope that in most cases the sellers would be sympathetic and release the other party from the contract at little or no cost, but contractually they are not obliged to do that.”
Standardising the Covid clause to protect both buyers and sellers
Even before the start of the pandemic, the cause of one in five property purchase failures was a break in the chain. In 2017, the phenomenon cost homeowners over £500 million a year in unrecovered conveyancing, valuation, brokerage, and survey costs, while also leaving sellers with properties that were harder to sell. Covid-linked lockdowns have increased these risks, with Butterfield finding more than half of buyers surveyed found themselves trapped mid-chain as a result of lockdown. Fully four out of ten buyers were forced to withdraw from their purchase after their offer had been accepted.
While ministers face calls to address the ‘property chain’ system, an interim measure may well be for the UK government to standardise and mandate ‘Covid-19 clauses’ developed as a collaboration between the Ministry of Housing, Communities, and Local Government and the Home Buying and Selling Group. While the applicability of such clauses is limited to certain circumstances directly linked to the pandemic, the lived experience of the past year demonstrates its potential beneficial impact on the financial and emotional well-being of thousands of prospective homebuyers. The sector itself has also welcomed the clause, with Beth Rudolf calling it “a great idea, delivered very quickly to support the industry and consumers.”
This new clause, developed with governmental input, is still far from mandatory or universal in real estate contracts, raising the question of whether the Government should be undertaking an effort to promote or even mandate the use of such clauses through the end of the current crisis. Grassroots efforts such as the Campaign for Covid Relief for UK Homebuyers and Sellers (CCR-UK), for example, are urging Housing Secretary Robert Jenrick and the Government to extend “public protection and support” to impacted buyers and sellers by making the ‘Covid clause’ legally mandatory and valid as of the start of the first lockdown last March.
Parliamentary action to expand the remit of these clauses, or to retroactively extend their protections to the thousands of individuals who have already been impacted by painful (but necessary) public health decisions, could also offer the government a more realistic short-term route to delivering concrete action in response to the real estate crisis – while restoring public confidence in the stability of the housing sector and laying the groundwork for broader reform over the months ahead.
All the same, industry leaders such as Rudolf caution that the road to long-term reform will extend far beyond the pandemic. Among the many issues demanding regulatory change: the lack of a mandate for “the upfront provision of information at listing including leasehold, rentcharge, and authority information,” the absence of a requirement for buyers to “prove they can afford the property through a certificate confirming their lender’s decision in principle or source of funds” and for sellers to demonstrate their relationship to the property “to avoid seller impersonation fraud,” and the need for “regulation of property agents and digitisation of the Land Registry, both in terms of applications and machine readable deeds.”
If and when the UK addresses these regulatory shortcomings, industry representatives insist that “once an offer is accepted, the parties can transact on related transactions knowing that everything will go through” – in short, that both buyers and sellers will enjoy a level of certainty that has been sorely lacking from the market since the start of the pandemic.