head of Chancellor Kwasi Kwarteng’s mini-budget on Friday, the Times reported that sweeping plans to cut stamp duty are in the works as part of efforts to boost economic growth. Downing Street declined to comment. But while home buyers may welcome a possible stamp duty cut, it could also lead to them paying higher monthly mortgage bills, a financial expert has warned. Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, said potential cuts to stamp duty could “risk doing more harm than good”. He said the boost in demand in the housing market could push up house prices further, at a time when the supply of available homes is already tight. Borrowers could then find themselves paying higher monthly mortgage costs if the price they had to pay for their home has increased. Mortgage rates are already on the rise and the Bank of England is expected to raise the key rate further on Thursday, pushing lending rates higher. Ms Coles said: “You can understand why the government is concerned about the housing market because there is a risk that rising mortgage rates and rising prices will dampen buyer enthusiasm. We know from recent experience that a stamp duty holiday effectively stimulates demand. “No buyer will ever complain about a tax cut, but if the government were to cut stamp duty it would be ignoring the fact that the real drag on the property market is a severe lack of supply. “Stimulating demand without addressing supply issues would risk more buyers chasing a small number of properties, pushing prices up. It’s what we saw over the holidays for the coronavirus-inspired stamp duty. “By raising prices in an era of rising mortgage rates, the end result will be higher monthly mortgage costs, which will be increasingly unaffordable. That alone could be enough to deter buyers, so there’s a risk it could end up doing more harm than good.”
Stamp duty holiday effects
A stamp duty holiday introduced by former chancellor Rishi Sunak expired last year. Increases in demand were seen during the holidays as shoppers rushed to maximize their savings. According to the latest figures from the Office for National Statistics (ONS), the average house price in the UK rose by 15.5 per cent year-on-year in July, marking the biggest rise in 19 years. The rise in annual inflation was mainly due to “a base effect” from price declines seen this time last year as a result of changes to the stamp duty holiday, the report said. In London, house prices rose to £544,000, an annual increase of £45,000.
Reducing stamp duty is ‘unlikely’ to improve consumer confidence
Earlier this month, the Royal Institution of Chartered Surveyors (Rics) said average stock levels on estate agents’ books were at a record low of 34 homes per branch, fueling upward pressure on house prices. Lawrence Bowles, director of research at Savills, said: “This morning’s news of a stamp duty cut suggests the government will be hoping to support demand at a time when lead indicators suggest it is easing after two years. “In doing so, they will pay close attention to how the outlook for the housing market affects consumer confidence and spending in the economy. “In particular they will hope that it will offset the impact of rises in the cost of living and, more specifically, higher mortgage costs which look set to put pressure on house prices and transaction levels next year. “Realistically, it seems unlikely that the government will be able to implement stamp duty changes that fully offset these two major concerns for shoppers. “Certainly, they should be doing a lot more than just raising the stamp duty thresholds in line with the levels of house price growth seen since we came out of the first lockdown.”
“It will worsen the housing crisis”
Richard Fearon, chief executive of Leeds Building Society, said: “Cutting stamp duty rates would just be another short-term quick fix that will ultimately make the housing crisis worse, not better. “The Prime Minister and the Chancellor rightly want to prioritize development. But they should deliver this in a much more sustainable way by investing in building enough homes, not by funding sweeping stamp duty cuts. Using the tax system in this way will drive up house prices, which will only exacerbate the problems facing first-time buyers. “Governments have successively resorted to quick-fix solutions to boost demand rather than addressing structural flaws in the housing market and ensuring there is enough supply. “We need to wean ourselves off an election-cycle-driven approach and come up with a long-term plan to help aspiring homeowners and also the economy.” Karen Noye, mortgage expert at Quilter, said the possible reduction in stamp duty could mean first-time buyers, who already benefit from some relief from stamp duty, will face stiffer competition from house movers. He added: “This doesn’t even take into account the massive house price rises we’ve seen over the past year, making saving for a deposit almost impossible without outside help.”
