Will cut to stamp duty do much to house prices and is it a good move?

The government today announced a massive cut in stamp duties in an effort to ease the burden on new buyers, but experts warn it could have the opposite effect.

The threshold for stamp duty for home buyers will rise from £125,000 to £250,000 and from £300,000 to £425,000 for first-time buyers.

The maximum value of a property that can be claimed as a first buyer deduction will also increase from £500,000 to £625,000.

Raising the threshold to £250,000 means that a third of all houses currently for sale are now fully exempt from stamp duty in England, up from 7 per cent when the threshold was £125,000, according to Rightmove.

In recent months, the housing market was thought to be weakening as the cost of living crisis and rising interest rates started to dampen demand and activity.

In his statement, Chancellor Kwasi Kwarteng said the move would help 200,000 people move up the housing ladder, but experts are skeptical it will be the first buyers to benefit from the announcement.

A major criticism of the plans is that lowering stamp duties will increase demand, pushing house prices further due to the lack of supply, raising the financial barrier for first-time buyers.

Anil Mistry, director and mortgage broker at RNR Mortgage Solutions: ‘At first glance, this seems like a good move.

‘But if this causes demand to rise, house prices will rise.

‘Then the extra money paid for the house price is more than the actual saving on stamp duty. It also means that more deposits are made and/or a higher mortgage, so more interest in the longer term.’

When the government introduced a stamp duty holiday in 2020 to sustain the housing market, the increase in activity caused a spike in house prices.

Total transactions in the year to June 2021 were up 19 percent compared to the previous 12 months, according to CBRE.

However, activity was concentrated in the most expensive real estate classes that generated the greatest savings from the tax freeze.

Furthermore, experts point out that the savings will be small if you consider the rising cost of mortgages as interest rates continue to rise, and are expected to continue to rise in response to the government’s package of radical tax cuts.

Tom Bill, Head of UK Residential Research at Knight Frank, said: ‘What the Chancellor gives away, the Bank of England will more than take away.

“Many buyers will find that the impact of rising mortgage rates is quickly overshadowing the benefit of a cut in stamp duties, leaving prices under significant pressure next year.”

Viewed in this way, the tax cut could risk benefiting only homeowners looking to move or wealthy buyers seeking a home closer to the top of the market for the first time, not those trying to get up the ladder with cheaper homes that already priced out. market.

The yield on five-year fixed-term mortgages rose from 2.64 percent in December 2021 to 4.33 percent this month, following the Bank of England’s most recent rise in the key rate to 2.25 percent.

For a £250,000 property, this means you would have to pay an additional £137 in mortgage payments per month, a total of £1,644 more per year.

Following the stamp duty reduction, which came into effect at midnight on September 23, the maximum savings for new buyers is £6,250 as their exemption threshold rises.

While other buyers will save up to £2,500 as the threshold at which stamp duty kicks in is permanently doubled from £125,000 but the rates of the tax have not changed.

James Turford, co-founder of mortgage broker Even, said, “Abolishing stamp duties benefits existing homeowners and provides more of a buying opportunity for wealthy individuals and opportunistic real estate investors, not generational rents.”

However, as the Help to Buy scheme expires next month and there are no comparable replacements lined up, the reduction in stamp duty for first-time buyers will provide some relief from the overall purchase cost and may encourage larger homeowners to downsize and free up space. make for families.

Richard Davies, Managing Director of Chestertons, said: “As Help to Buy draws to a close, the tax cut will be of particular interest to new buyers who have always faced challenging market conditions in London.

“Despite the general positive gesture of lowering stamp duties, the cut could prompt home hunters who had previously suspended their property searches to resume operations.

“If this additional demand is not met quickly, the tax cut could amplify the existing imbalance between supply and demand, which then leads to an initial rise in real estate prices.”

Samuel Mather-Holgate, advisor at Mather and Murray Financial, added: “In the long run, this will lead to higher home price inflation, but first-time buyers would rather pay a little more for their property than a account for stamp duties.’

There is also market relief that the move is permanent and not another stamp duty holiday.

This Is Money Editor Simon Lambert says the market is still recovering from the Covid stamp duty holiday and while it may seem counterintuitive in the current circumstances, it’s always a good time to cut a bad tax.

Many have pointed out that the cut does not address the lack of housing supply in the market that continues to push prices up and make it so difficult for first-time buyers to save for a down payment.

But in his statement, the chancellor promised a package of planning reforms and the sale of unused state land, as well as targeted investment zones across the country in an effort to boost housing construction.

Stuart Law, chief executive of the Assetz Group of real estate and financial services companies, said: “The planning reforms being proposed today should therefore be widely welcomed, although we have seen proposals of this nature come up before, only to find them against us.” to keep. into the long grass.’

Freddie Poser, director of Priced out added: ‘Stamp tax is a distorting tax and lowering it will reduce friction in the housing market, but if the government really cares about helping people up the housing ladder, it should focus on improving of the offer.

“We hope they push through with their plans for Street Votes and other changes that will boost new housing development.”