Will lowering the stamp duty raise housing prices and is it a good move?

The government announced a huge stamp duty cut today in a bid to ease the burden for first-time buyers, but experts warn it could have the opposite effect.

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

It will also increase the maximum value of the property that can be claimed for first time buyers exemption from £500,000 to £625,000.

> Stamp Duty Reduction Calculator: How much will you pay after the mini-budget?

Reducing the stamp duty is one of the tax relief measures introduced by the government in an effort to boost the country’s economic growth

Raising the minimum to £250,000 means a third of all homes currently for sale are completely stamp duty free in England, up from 7 per cent when the minimum was £125,000, according to Rightmove.

In recent months, the housing market was thought to have begun to soften, as the cost of living crisis and rising interest rates began to dampen demand and activity.

In his statement, councilor Kwasi Kwarting said the move would help an additional 200,000 people move up the housing ladder, but experts are skeptical that this is the first time buyers have benefited from the ad.

A major criticism of the plans is that lowering the stamp duty will increase demand causing house prices to rise further due to lack of supply, increasing the financial hurdle for first time buyers.

On the face of it, this looks like a good move, said Anil Mistry, Principal and Mortgage Broker at RNR Mortgage Solutions.

However, if this means that demand increases, then housing prices will go up.

Then, the additional amount paid to the price of the house will be more than the actual savings made in stamp duty. It will also mean more deposits and/or a higher mortgage, which means more interest in the long run.

When the government introduced a stamp duty holiday in 2020 in order to preserve the housing market, the increase in activity drove up house prices.

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

However, activity was concentrated within the more expensive real estate ranges that saw the largest savings from the tax freeze.

Mortgage rates have risen dramatically since December last year as the Bank of England took action to try to curb inflation

Mortgage rates have risen dramatically since December last year as the Bank of England took action to try to curb inflation

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

Tom Bell, UK head of residential research at Knight Frank, said: “What the Chancellor gives, the BoE will take more than just a thing.

“Many buyers will soon find the effect of higher mortgage rates taking advantage of the stamp duty cut, which will maintain strong downward pressure on rates next year.”

Viewed this way, a tax cut may only risk benefiting homeowners looking to move in or affluent first-time buyers looking for properties closer to the top of the market, not those trying to move up the ladder with cheaper properties that are already priced off the market. . Market.

Five-year mortgage rates jumped from 2.64 per cent in December 2021 to 4.33 per cent this month after the Bank of England’s latest base rate rose to 2.25 per cent.

For a property valued at £250,000, that would mean an extra £137 a month in mortgage payments, for a total of an extra £1,644 per annum.

Rising interest rates have put additional pressure on first-time buyers who now face increasing mortgage costs in addition to rising home prices.

Rising interest rates have put additional pressure on first-time buyers who now face increasing mortgage costs in addition to rising home prices.

After the stamp duty cut, which took effect at midnight 23 September, the maximum savings for first-time buyers was £6,250 with the exemption limit increased.

While other buyers will save up to a maximum of £2,500 at which the stamp duty is permanently doubled from £125,000, the tax rates remain unchanged.

Eliminating stamp duty benefits existing homeowners and provides more buying opportunities for affluent individuals and opportunistic real estate investors, not the rental generation, said James Turford, founding partner of mortgage broker Even.

However, with the Help to Buy scheme ending next month and no comparable alternative, the stamp duty cut will provide some relief for first-time buyers from the overall cost of buying and may encourage larger homeowners to downsize and free up space. for families.

Richard Davies, managing director of Chestertons, says: “As the end of Help to Buy approaches, the tax cut will be of particular importance to first-time buyers who have always faced challenging market conditions in London.

However, despite the general positive gesture of lowering stamp duty, the savings may prompt home hunters who have previously put their property search on hold to resume their activity.

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

Added Samuel Mather Holgate, an advisor at Mather and Murray Financial, “In the long term, this will mean higher house price inflation, but first-time buyers would rather pay a little more for their property than in the stamp duty bill.”

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

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

Many have pointed out that the cut does not address the housing shortage in the market that continues to drive up prices and makes it very difficult for first time buyers to save up for a deposit.

However, in his statement, the chancellor promised a planning reform package and sale of unused government land as well as targeted investment areas across the country in a bid to stimulate house building.

‘The planning reforms proposed today should therefore be widely welcomed,’ said Stuart Law, chief executive of Assetz Group of real estate and financial services companies, even though we’ve seen proposals of this kind put forward several times before, only to be rolled out. in the tall grass.

Priced out director Freddy Bowser added: “Stamp duty is a distortionary tax and cutting it down would reduce friction in the housing market, but if government is really interested in helping people get on the housing ladder, it needs to focus on improving supply.

“We hope they will follow through with their plans for Street Votes and other changes that will boost new home construction.”

Best mortgage rates and how to find them

Mortgage rates skyrocketed as the Bank of England’s base rate rose rapidly.

If you are looking to buy your first home, move or remortgage, or are a buy-to-let owner, it is important to get good mortgage advice from a broker who can help you find the best deal.

To help our readers find the best mortgage, This is Money has partnered with an independent, no-fee L&C broker.

The Mortgage Calculator backed by L&C allows you to filter deals to see which ones fit your home value and deposit level.

You can also compare different durations of mortgage rates, from two-year fixes, to five-year fixes and ten-year fixes, displaying monthly and total costs.

Use the tool at the link below to compare the best deals, factoring in fees and prices. You can also start an online application on your own time and save it as you move forward.

> Compare the best mortgage deals available now

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