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What does Kwasi Kwarteng’s stamp duty cut mean for house prices?

Rather than reducing overall buying costs there are concerns the stamp duty cut will push up house prices

By
Prudence IveyEditor, Homes & Property
@PrudenceIvey
23 September 2022
H

omebuyers will see their stamp duty bill cut from today after Kwasi Kwarteng raised the threshold at which the property tax is paid as part of his Growth Plan.

The Chancellor said the move would “increase confidence and help families aspiring to own their own home”. He also estimated that about 200,000 more people a year will pay no stamp duty at all.

The tax change could spur greater activity in the housing market, especially in the immediate term. Rightmove reported a 10 per cent jump in traffic to its website within an hour of the announcement.

However, there was widespread scepticism about the changes’ ability to offset rising mortgage rates or boost affordability.

Will the stamp duty cut make it more affordable to buy?

The Bank of England base rate rose 0.5 per cent yesterday, taking interest rates to 2.25 per cent, their highest level since 2008 with some predicting a full 1.0 per cent rise next month as the monetary policy committee attempts to tackle the worst inflation in 40 years.

This change added £49 per month to the average tracker mortgage, according to figures from UK Finance.

Tom Bill, head of UK residential research at Knight Frank, said: “Together with other measures designed to boost the economy, a cut will intensify and prolong demand in the housing market.

“However, what the Chancellor is giving away, the Bank of England will more than take away. Many buyers will find the impact of rising mortgage rates soon eclipses the benefit of a stamp duty cut, which will keep firm downwards pressure on prices next year.

“The cost of a five-year fixed-rate mortgage has almost tripled over the last year and this upwards trajectory will continue.

“Almost four million first-time buyer mortgages have been issued since 2009, which is a large group of homeowners who don’t know what it’s like when monthly interest payments rise meaningfully. The gravitational forces of higher rates will bring house prices back down to earth irrespective of any stamp duty cut.”

Will the stamp duty cut push up house prices?

A previous stamp duty holiday, introduced by former chancellor Rishi Sunak, ended last year. During the holiday there were spikes in house sales as the holiday was phased out and house prices hit a string of record highs.

Andrew Montlake, managing director of mortgage brokers Coreco said: “The stamp duty change announced is mercifully effective today and a permanent change, rather than an unwanted holiday period that causes more issues than it solves.

“This will indeed help many first-time buyers who have agreed prices now, but we need to be careful that, as usually happens, house prices don’t simply rise further to eat up any potential savings and push homes out of reach for many more, especially at a time of higher interest rates.”

Rising mortgage rates mean people trying to move on to or up the housing ladder face mounting costs.

There is also the hurdle of raising a deposit. According to property website Rightmove, first-time buyers typically face finding £22,409 for a 10 per cent deposit on a home, up from £14,135 a decade ago.

At the same time there is a significant shortage of supply due to low rates of new home building and a reluctance of existing home owners to sell in an uncertain economy. This has so far helped prevent a big dip in house prices.

Lucian Cook, head of residential research at Savills, said: “The biggest beneficiaries of the stamp duty changes are likely to be first time buyers in London and the more expensive parts of South East England, where the savings on offer will make their deposit requirements look a little less daunting.

“A maximum up front stamp duty saving of £2,500 for other buyers, is relatively small in relation to the additional annual mortgage costs seen since the beginning of the year. And as the cut is permanent it is unlikely to bring the same urgency to the market as the recent stamp duty holiday.

“The changes will undoubtedly be welcomed by those in the process of buying. But in the short term, they are unlikely to result in a further spate of house price growth and instead are more likely to temper the effect of the wider economic headwinds facing the housing market.”

Average stamp duty savings for first-time buyers

Region

Value

SDLT before

SDLT now

£ saving

% saving

London

£456,307

£7,815

£0

£7,815

100%

North East

£132,798

£0

£0

£0

0%

England

£249,453

£0

£0

£0

0%

Source Savills/Land Registry

Sarah Coles, senior personal finance analyst at Hargreaves Lansdown said: “Higher mortgage rates and higher property prices form a toxic cocktail, that risks killing off demand. For buyers facing forking out thousands of pounds right now (the stamp duty cut is) a welcome change.

“However, there’s every chance that the change doesn’t drain the toxic cocktail, it just remixes it.”

She added: “A shortage of buyers isn’t the biggest problem facing the property market right now, the real brake on the property market is a severe shortage of supply.”

Nick Whitten, head of residential and living research at JLL UK, said: “Despite the increase in the first time buyer stamp duty exemption level, the likely house price growth that it will fuel could ultimately hurt those aspiring purchasers more than it helps them. And this increased affordability pressure comes at a time when their main support product Help to Buy is coming to an end.

“The UK is facing an acute housing shortfall – we build far too few homes to meet demand. The stamp duty reduction is unlikely to be the policy silver bullet to fix that.”

Edward Heaton, founder and managing partner of buying agents Heaton and Partners, said: “The extensions to the nil rate band will be welcomed by first time buyers and for those acquiring lower value properties especially, but I can’t help feel the result will just be to shore up demand as we head towards a recession.

“It may also fuel inflation and it will ultimately make entry to the housing market ever more unaffordable for first time buyers when combined with increasing interest rates…

“Whilst I believe the recent house price increases outside London are probably sustainable, the stamp duty cuts announced today will definitely increase the chances of creating a bubble which may then burst at some stage.”

What are the new stamp duty costs?

All buyers will pay up to £2,500 less stamp duty after the threshold was doubled from £125,000 to £250,000.

First-time buyers will save more after the lower threshold at which those buying their first home rose from £300,000 to £425,000. The property price cap for this first-time buyer relief was also raised, from £500,000 to £625,000. This puts the maximum saving for first-time buyers at £11,250.

Property purchase price

SDLT rate

Up to £250,000

0%

The portion from £250,001 to £925,000

5%

The portion from £925,001 to £1.5 million

10%

The portion above £1.5 million

12%

The tax cut is permanent and comes into force today.

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