UK markets close in 3 hours 56 minutes
  • FTSE 100

    6,962.90
    -42.49 (-0.61%)
     
  • FTSE 250

    16,993.78
    -327.19 (-1.89%)
     
  • AIM

    808.02
    -5.96 (-0.73%)
     
  • GBP/EUR

    1.1169
    -0.0009 (-0.08%)
     
  • GBP/USD

    1.0871
    -0.0015 (-0.13%)
     
  • BTC-GBP

    17,926.32
    +426.38 (+2.44%)
     
  • CMC Crypto 200

    445.46
    +16.68 (+3.89%)
     
  • S&P 500

    3,719.04
    +71.75 (+1.97%)
     
  • DOW

    29,683.74
    +548.75 (+1.88%)
     
  • CRUDE OIL

    82.40
    +0.25 (+0.30%)
     
  • GOLD FUTURES

    1,657.50
    -12.50 (-0.75%)
     
  • NIKKEI 225

    26,422.05
    +248.07 (+0.95%)
     
  • HANG SENG

    17,165.87
    -85.01 (-0.49%)
     
  • DAX

    12,071.09
    -112.19 (-0.92%)
     
  • CAC 40

    5,709.76
    -55.25 (-0.96%)
     

Stamp duty cut ‘could spectacularly backfire’ first-time buyers warned

·6-min read
The average cost of a  home in London is now £543,517, according to the Office of National Statistics  (Daniel Lynch)
The average cost of a home in London is now £543,517, according to the Office of National Statistics (Daniel Lynch)

London first-time buyers will no longer pay stamp duty tax on the first £425,000 of a property price from today, Chancellor Kwasi Kwarteng has announced, raising the threshold from £300,000.

First-time buyers are now permitted to access the tax relief when they buy a property that costs up to £625,000 rather than the previous limit of £500,000.

In London, where the average sold house price is now £543,517, a first-time buyer would have faced a stamp duty bill of £17,175 — as relief would not have been claimable prior to today — whereas now they would pay £5,925, a saving of £11,250.

“First-time buyers are the lifeblood of the housing market so targeting them in particular with assistance that will help them onto the ladder is particularly welcome,” said Jason Tebb of OnTheMarket.com.

“The £500,000 limit ruled out many properties in London and the South East in particular whereas the new £625,000 limit will give buyers more leeway and ultimately increase their purchasing power.”

However, critics warn that stimulating the housing market without tackling supply issues could see property prices rise — at a time of successive interest rate hikes, soaring mortgage rates and high inflation.

How do tax savings compare to increased mortgage repayments?

Yesterday saw the Bank of England increase its base rate of interest by 0.5 per cent, adding £1,512 a year to mortgage repayments for the average first-time buyer in London.

The average mortgage payment for a first-time homeowner in London will rise by £126 to £2,488 a month, should lenders pass on the latest increase to borrowers, according to Rightmove.

“What the Chancellor is giving away, the Bank of England will more than take away,” said Tom Bill at Knight Frank. “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.”

Another base interest rate increase is expected when the Monetary Policy Commitee (MPC) meet again in November, with City market forecasters predicting the next rise to be as much as one per cent within an hour of the Chancellor’s Growth Plan mini-Budget announcement.

“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,” said Tom Bill of Knight Frank.

“The gravitational forces of higher rates will bring house prices back down to earth irrespective of any stamp duty cut.”

Who wins?

The average cost of a first-time buyer home in the capital is now £456,307, according to Savills, which equates to a £7,815 saving on stamp duty.

Across England, where the average house price is £344,179, the saving on stamp duty is £2,500 for a typical home mover.

“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,” said Lucian Cook of Savills.

“However, given a combination of recent house price growth and interest rate rises, this is not going to magically result in a surge of first-time buyer home buying activity.”

Who loses?

The savings for first-time buyers, particularly in London, are significant.

Yet buyers in this sector need house prices to come down rather than being saddled with increasing mortgage debt, argues Simon Nosworthy of Osbornes Law.

Industry experts across the board welcome news that the changes are permanent, with hope that the surges seen during the stamp duty holiday of 2020-2021 can be avoided.

That said, any stimulus to the housing market is likely to increase demand and may in fact push up house prices.

“The Government has fired a starting gun today designed to encourage a frenzy of first-time buyers to try and get on the housing ladder,” said Jonathan Rolande of The National Association of Property Buyers.

“Cutting stamp duty without enough housing stock is rather like shops announcing massive sales — then leaving their shelves empty for those flooding in through the doors.

“Supply simply isn’t there which means this cut could spectacularly backfire by failing to help the people it’s designed to.

“The Government’s Growth Plan promised to release more Government land to support housebuilding and to remove planning restrictions to boost supply. We now need to see the detail of that because it needs to go really far and wide to solve the supply crisis we have in the sector. There’s also the risk we could now see house prices increase in response to the spiked demand.”

What barriers do London first-time buyers still face?

Raising a deposit remains the biggest barrier for first-time buyers, particularly those trying to save while grappling with rising rents and soaring energy costs.

Government-backed schemes to help buyers secure a first home include Shared Ownership, Right to Buy and Help to Buy.

More than 355,600 buyers have used the Help To Buy scheme since its launch in 2013. London buyers have been able to secure new homes with a five per cent deposit; a Government loan of up to 40 per cent of the total home value; plus a conventional mortgage for the remaining amount.

Applications for the scheme close on 31 October 2022, ahead of its official closing date of 31 March 2023.

The scheme has faced criticism for inflating house prices and creating a ticking timebomb for those who do not manage to sell up before the five-year interest-free period expires on the government loan.

That said, at the very least Help to Buy has helped 36,000 London first-time buyers on to the property ladder and has supported the construction of hundreds of thousands of homes. Significantly, there is nothing planned to replace it, either for first-time buyers or struggling renters.

What about building new homes?

The Chancellor said: “To increase housing supply and enable forthcoming planning reforms, we will [...] increase the disposal of surplus government land to build new homes.”

The Growth Plan details changes to rules to allow Government departments to retain more income from the sale of surplus government land. These changes will encourage departments to increase the sale of public land, including sites for housing, and allow departments to reinvest to support public services.

“The ambition to reduce planning red tape and improve delivery is particularly interesting because if there is one thing we need more than anything it is additional affordable housing to sell and to rent,” said north London estate agent and former RICS residential chairman Jeremy Leaf.

“Nothing is more frustrating than gaining planning permission for suitable schemes and then waiting sometimes more than a year for work to begin as often unnecessary regulation needs dealing with.”