Buy-to-let investors are being warned to prepare for a bumpy start to 2025 as impending changes to stamp duty are expected to create a flurry of activity, followed by a sharp slowdown. This prediction comes from Nationwide’s chief economist, Robert Gardner, who believes the market will experience a short-term spike before a quieter period.
Stamp duty changes to skew early 2025 activity
The anticipated Stamp Duty adjustments are likely to drive buyers to bring forward property purchases to avoid additional costs, leading to a surge in transactions in the first three months of 2025. Gardner explains:
“This will lead to a jump in transactions in the first three months of 2025 (especially in March) and a corresponding period of weakness in the following three to six months, as occurred in the wake of previous stamp duty changes.”
This pattern mirrors earlier disruptions in the market caused by tax changes, such as in 2016, when landlords rushed to complete purchases before the introduction of the 3% stamp duty surcharge on second homes. Gardner notes that short-term volatility can obscure the true state of the market but remains cautiously optimistic.
“Providing the economy continues to recover steadily, as we expect, the underlying pace of housing market activity is likely to continue to strengthen gradually as affordability constraints ease.”
Rental pressures hamper first-time buyers
While the broader housing market has demonstrated resilience throughout 2024, ongoing affordability issues remain a challenge for potential first-time buyers. High property prices relative to average earnings have made saving for a deposit increasingly difficult, particularly for those in the private rented sector.
Gardner highlights the struggles caused by rising rental costs:
“The deposit hurdle remained high for prospective first-time buyers, a challenge that had been made worse by record rates of rental growth in recent years, which has hampered the ability of many in the private rented sector to save.”
For landlords, this underlines the importance of their role in providing quality rental homes amid mounting pressures on renters.
Mortgage market signals gradual improvement
Despite these challenges, the housing market performed better than expected throughout 2024, supported by gradually improving economic conditions. Mortgage approvals picked up towards the end of the year, surpassing pre-pandemic levels, while house prices returned to positive annual growth, nearing 4% in November.
Gardner points to a shift in borrowing costs as a contributing factor, though rates remain elevated compared to recent years. “For many of those with sufficient savings for a deposit, meeting monthly payments was a stretch because borrowing costs remained well above those prevailing in the aftermath of the pandemic,” he says.
A typical mortgage rate for someone with a 25% deposit hovered around 4.5% for much of the year, significantly higher than the 1.5% rates seen in late 2021 before the Bank of England began raising the Bank Rate.
Encouragingly, Gardner believes affordability constraints will begin to ease in 2025 as interest rates fall modestly and earnings outpace house price growth, which is expected to remain in the 2% to 4% range.
What does this mean for landlords?
For buy-to-let investors, the message is clear: 2025 could start with a rush of activity but may be followed by quieter months as the market readjusts. While stamp duty changes are likely to distort short-term patterns, the underlying market appears resilient, offering long-term opportunities.
The ongoing affordability challenges facing first-time buyers also highlight the crucial role landlords play in supporting the housing market. With demand for rental properties remaining strong, landlords are well-positioned to provide stability and meet growing needs.
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