Will a stamp duty cut increase house prices and is it a good move?

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

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

The maximum value of a property on which first-time buyers relief can be claimed will also increase from £500,000 to £625,000.

> Stamp Duty Reduction Calculator: How Much Will You Pay After the Mini-Budget?

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

Raising the threshold to £250,000 means that a third of all homes 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 began to dampen demand and activity.

In his statement, Foreign Minister Kwasi Kwarteng said the move would help another 200,000 people get into housing, but experts are skeptical that it will be first-time buyers who will benefit from the announcement.

One of the main criticisms of the plans is that the reduction in stamp duty will increase demand, which will further increase house prices due to lack of supply, increasing the financial hurdle for first-time buyers.

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

‘However, if this means that demand increases, house prices increase.

So the additional money paid towards the price of the house will be greater 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 exemption in 2020 to support the housing market, increased activity sent house prices soaring.

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

However, activity was concentrated in the most expensive real estate strips that recorded the largest savings from the tax freeze.

Mortgage rates have risen significantly since December last year as the Bank of England takes steps to try to curb inflation.

Mortgage rates have risen significantly since December last year as the Bank of England takes steps to try to curb inflation.

Plus, experts say the savings will be smaller when you factor in the rising cost of mortgages as interest rates continue to rise and are expected to rise further in response to the government’s package of sweeping tax cuts.

Tom Bill, head of UK residential research at Knight Frank, said: ‘What the Chancellor is giving away, the Bank of England will take in spades.

“Many buyers will find that the impact of rising mortgage rates will soon dwarf the benefit of a stamp duty cut, keeping steady downward pressure on prices next year.”

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

Five-year fixed-term mortgage rates have risen from 2.64% in December 2021 to 4.33% this month following the most recent increase in the Bank of England base rate to 2.25%.

For a £250,000 property, this means paying an additional £137 per month in mortgage payments, for a total of £1,644 more per year.

Rising interest rates put additional pressure on first-time homebuyers who now face higher mortgage costs, as well as rising home prices.

Rising interest rates put additional pressure on first-time homebuyers who now face higher mortgage costs, as well as rising home prices.

Following the stamp duty cut, which came into effect at midnight on 23 September, the maximum savings for first-time 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 tax rates have not changed.

James Turford, co-founder of mortgage broker Even, said: “Removing stamp duty benefits existing homeowners and provides more buying opportunities for wealthy individuals and opportunistic property investors, not generating income.”

However, with the help-to-buy scheme ending next month and no similar replacement expected, the stamp duty cut will provide some relief for first-time buyers from the full cost of purchase and may encourage more homeowners. large to reduce size and free up space. for families

Richard Davies, Managing Director of Chestertons, says: ‘With the end of Help to Buy, 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 reducing stamp duty, the savings could see house hunters who previously called off their property search resuming their business.

“If this additional demand is not met quickly, the tax cut could increase the existing imbalance between supply and demand, consequently leading to an initial increase in property prices.”

Samuel Mather-Holgate, adviser at Mather and Murray Financial, added: “In the long term, it will mean higher house price inflation, but first-time buyers would rather pay a bit more for their property than a stamp duty.”

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 the stamp duty review, says the market is still reeling from the Covid stamp duty holiday and although it may seem counterintuitive in current conditions, “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 on the market that continues to drive up prices and make it difficult for first-time buyers to save for a deposit.

However, in his statement, the foreign minister promised a package of planning reforms and the sale of unused government land, as well as targeted investment zones across the country in a bid to stimulate housing construction.

Stuart Law, chief executive of the Assetz Group of real estate and financial services companies, said: “The planning reforms proposed today should therefore be widely welcomed, although we have seen proposals of this nature put forward many times before, only to be kicked”. in the tall grass.

Freddie Poser, director of Priced out, added: “Stamp duty is a distorting tax and reducing it will reduce friction in the housing market, but if the government really cares about helping people afford housing, then you should focus on improving the offer.”

“We hope they go ahead with their Street Votes plans and other changes that will spur new housing construction.”

The best mortgage rates and how to find them

Mortgage rates have risen substantially as the Bank of England base rate has risen rapidly.

If you’re thinking about buying your first home, moving or remortgaging, or are a buy-to-let landlord, it’s important to get good, independent 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 independent broker L&C.

Our L&C-powered mortgage calculator can allow you to filter offers to see which ones best match your home value and deposit level.

You can also compare different fixed-rate mortgage durations, from two-year arrangements to five-year arrangements to ten-year arrangements, with monthly and total costs displayed.

Use the tool at the link below to compare the best deals, taking both fees and rates into account. You can also start an online application on your own time and save it as you go.

> Compare the best mortgage deals available now

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