Chancellor Kwasi Kwarteng’s stamp duty changes will be heartily welcomed by struggling first-time buyers and would-be movers, desperate for some help in the face of soaring interest rates.
Kwarteng doubled the nil-rate stamp duty band to £250,000, bringing an average tax saving of £2,500 for all homebuyers and making almost half of all home moves in England tax free.
For first-time buyers, particularly in areas with high house prices, the savings are even greater. They can save a maximum of £11,250 in tax – with a new nil-rate band of £425,000, based on a higher £625,000 spend cap.
But analysts are sounding the alarm that the measures will be nowhere near enough to save the property market from a major downturn as interest rates rise.
The tax cuts will boost sales and house prices, just as rising interest rates mean the market teeters on the edge of major house price falls.
Experts are warning that the boost to demand created by the cuts will not be enough to counteract the enormous affordability crunch hitting the market, as soaring inflation pushed the Bank of England to raise interest rates by a further 0.5 percentage points on Thursday to 2.25pc.
The tax cut will stoke demand – and cushion price falls
The tax cut will partially offset the blow to the housing market caused by the cost of living crisis and rising mortgage rates, says Karl Thompson, of the Centre for Economics and Business Research, a think tank.
Previously, CEBR had forecast a 10pc year-on-year fall in transactions in 2023. Following the stamp duty cut, as well as the energy price cap guarantee, this drop will now be only 2pc, Thompson says.
Wannabe homeowners voted with their clicks: in the hour after the announcement was made, traffic on Rightmove, a property website, jumped by 10pc.
In turn, if higher numbers of homes are sold, it will soften the coming blow to house prices. CEBR’s most recent forecast was for a 4.5pc house price drop across the UK in 2023. Values are still likely to fall next year, but the drop should now be smaller, Thompson says.
In the longer term, in three or four years’ time, house price growth will be two percentage points higher because of the cut, he adds. Transactions will jump by 6pc.
Help for the markets most at risk
The stamp duty cuts could be a significant lifeline for the property markets that are forecast to record the biggest price drops.
London and the South East are where house prices are most out of kilter with earnings, and where buyers are most reliant on mortgage lending. It is here where home values – particularly at the lower end of the market – are most exposed to rising interest rates.
The cuts to first-time buyer stamp duty rates will almost exclusively target this market. On average, just 31pc of first-time buyer sales were above £300,000 in the last year, according to analysis by Hamptons estate agents – meaning the vast majority of entry-level purchasers already paid no tax. In London, however, 83pc of first-time buyer sales were above the £300,000 threshold.