Flipping Homes

MoneyHow can we make better use of the homes we already have? Buying a home to do up and sell on, is of course, driven by the underlying desire to make a profit, but there are also big benefits for the wider housing market.

Since the downturn, house building has risen up the political agenda, increasingly becoming a numbers game. Parties of all colour have promised to build greater numbers of homes, but the supply of homes is far more than just about house building.

While big house builders are generally interested in large sites, making better use of existing homes is just as important. Those people who buy, refurbish and sell on individual homes also play a big role in housing delivery by improving the existing housing stock and carrying out the work needed to bring empty homes back into use. Last year we estimate that these micro developers refurbished around 30,000 homes, around a fifth of the number delivered by house builders.

In 2015 95% of flipped homes sold though Countrywide were refurbished and 9 in 10 were sold onto an owner-occupier. Typically these are homes which are bought by an investor, refurbished and then sold on within 12 months. Last year, homes bought and sold again within 12 months accounted for 3% of all homes sold (and 6% of all transactions) in England and Wales. While this is roughly half the level of 2003, the year of peak flipping, it still represents an important part.

Buying a home to refurbish and quickly sell on is a skill and requires a lot of work, time and money. Like house builders though, people who flip homes aim to turn a profit. Knowing the local housing market inside out and understanding what does or does not add value is fundamental to flipping a property. Last year £4.8 billion worth of homes were flipped across England and Wales, up from £2.8 billion in 2010, with homes flipped in virtually every market. Both Kensington and Chelsea (average price £1.3 million) and Burnley (average price £65,000) regularly top the league table for the numbers of homes bought and sold within a year.

But a flipped home in Central London tends to look rather different to one in North Manchester. With such vast disparities in the price of flipped homes across the country, investors tend to operate differently. In London and much of the South East, investors have targeted the bottom end of local markets, buying low and selling high. In these two regions the average flipped home was purchased for 20% below the local authority average before being sold for 25% above. Head north and the story is rather different. In Burnley, the flipping capital of the North, flippers buy homes for 5% above the local average and sell them on for 30% more. Targeting different parts of the market across the country is indicative of where investors believe there’s most likely to be someone willing to pay for a newly refurbished home.

In 2015 the average flipped home was sold for £251,000, a hefty 37% more than it was bought for. Given the Land Registry puts the rise in value of the average house in the last year at 5.6%, the vast majority of the increase comes from value added by the investor.

Under 1% of flipped homes rose in value by the Local Authority average or less. In cash terms the 37% increase in value equates to an average of £55,000, a figure which ranges from £13,000 in Wales to £100,000 in London. These figures are before any costs are taken into account. Given this big disparity, the scope and scale of work which can be carried out in different markets across the country varies hugely. Anyone buying a second home after April 2016 will face a rate of Stamp Duty three percentage points higher than existing levels. Both landlords and second homeowners, groups of people who buy and sell homes about as often as owner occupiers, will undoubtedly feel the effect of higher rates of Stamp Duty. But for those who buy and sell homes on a regular basis, it seems likely that the impact of new rates of Stamp Duty will be profound.

Today someone flipping a home pays an average Stamp Duty bill of £4,200, with 40% of purchases under the £125,000 mark and attracting no Stamp Duty at all. In the cheapest parts of Northern England, the average bill was just £15, with the majority paying nothing.

At the other end of the country, flipped homes in Westminster attracted a Stamp Duty bill of £45,000 and £43,000 in Kensington and Chelsea. Theimpact of high rates of Stamp Duty for those looking to buy, do up and sell a home will be keenly felt. The average bill will rise from £4,200 to £10,500 which in many cases will make the renovation and resale of homes by small investors unviable. Its impact will be felt most strongly in ‘middle England’, places where prices are close to or slightly above the national average. In places like Horsham, Herefordshire and Hambleton the increased Stamp Duty bill will account for over a third of the difference between the purchase and sale price. Beyond this level, and once other costs are taken into account, at current prices it’s likely to make buying, doing up and selling a home unviable.

The new Stamp Duty level will also mean that someone purchasing a home to renovate and sell on in many of the cheapest parts of the country, currently will have to pay for the first time. While having to pay Stamp Duty is likely to be a psychological barrier to some investors, in cash terms it’s unlikely to be at a sufficient level to make the flip unviable.

Equally at the other end of the scale, our modelling suggests that the bigger Stamp Duty bill can be absorbed into the margins of those flipping the most expensive homes in London and the South East. With the aim of increasing rates of homeownership, the new rates of Stamp Duty are likely to squeeze the number of homes bought by landlords. There is, however, a small army of small investors who are neither landlords nor second homeowners who will feel the full force of this policy. Those micro developers who buy, do up and then sell homes, often to first time buyers willing to pay a premium for a refurbished home, have dwindled in number as transaction costs have spiralled. Today the cash cost of Stamp Duty is twice what it was in 2003 in real terms, the year when flipping reached its peak. Increasing the Stamp Duty burden further for those very small developers will do very little to increase rates of homeownership with less supply coming to market. In places where margins are tightest, hiking the rate of Stamp Duty has the potential to substantially slow down the rate at which housing stock is improved.