Stamp duty holiday risks 'artificial' rise then fall in house prices

Tom Belger
·Finance and policy reporter
·6-min read

The announcement of a stamp duty holiday is likely to be welcomed by many buyers, but experts have warned the policy may not work as hoped by the UK chancellor.

Rishi Sunak confirmed in his summer statement that buyers will pay no tax on home purchases under £500,000 ($627,258) in England and Northern Ireland. It will apply from 8 July to 31 March next year. The threshold had previously been £125,000, albeit with higher thresholds for first-time buyers.

The finance minister said the measure was intended to “catalyse the housing market and boost confidence” as the government seeks to revive Britain’s coronavirus-hit economy.

The measures were welcomed by estate agents and lifted housebuilding stocks, but analysts voiced doubts about their effectiveness and think tanks questioned who stood to benefit most.

Some analysts warned it risked an “artificial” spike in property prices, followed by a dip when the holiday ends. Others argued Britain’s economic troubles were significant enough that tax cuts may barely lift demand at all.

UK chancellor Rishi Sunak has announced a temporary stamp duty cut. Photo: Education Images/Universal Images Group via Getty Images
UK chancellor Rishi Sunak has announced a temporary stamp duty cut. Photo: Education Images/Universal Images Group via Getty Images

Boost for buyers, estate agents and housebuilders

In the first place, the measures will reduce many buyers’ tax bills. The chancellor said the changes meant almost nine in 10 buyers will pay no stamp duty land tax (SDLT) at all on transactions.

Treasury analysis suggests buyers would save £4,500 on the average property purchase, though analysis by estate agent Barrows and Forester indicated lower savings of £2,465 in England.

But the reforms are mainly intended to drive additional sales in the property market, as a significant part of Britain’s economy.

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The government expects the measures to “maintain the growing momentum since the easing of lockdown.” Official papers argue this will protect and create housebuilding jobs, as well as driving additional consumer spending as buyers kit out new homes.

The Centre for Economic and Business Research (CEBR) welcomed the measures, predicting a 6% rise in transactions over the next nine months. It anticipates 41,000 additional property sales and 60,000 brought-forward sales as buyers make the most of the holiday.

Richard Donnell, research and insight director at Zoopla, agreed it would “help sustain the rebound’ in England. Eric Leenders, managing director of personal finance at lenders’ trade body UK Finance, shared the government’s confidence it would spill over into wider benefits for the UK economy.

READ MORE: UK government announces stamp duty holiday to boost property market

Investors and estate agents also appear to share the government’s belief tax cuts will boost demand, which has seen a fragile recovery since the lockdown began to ease.

UK housebuilders’ share prices have been rising all week after the plans were first reported over the weekend, with shares in Persimmon (PSN.L) up almost 10% since last Friday. Estate agent Savills (SVS.L) was also one of the biggest risers on the FTSE 250 (^FTMC) index on Wednesday.

“Estate agents such as Foxtons, Savills and Countrywide will all be hoping for a big step up in business,” added Russ Mould, investment director at AJ Bell.

Risk temporary cut will ‘distort the market’

Several experts warned the temporary nature of the measures mean the tax cuts may have unintended consequences, however.

Observers pointed out transactions and prices may spike as buyers rush to complete before the holiday expires next March, followed by a sudden drop. In the short term, buyers may save money on stamp duty, but if tax cuts start pushing up demand they may face higher asking prices.

“Holiday periods tend to result in an artificial time of higher demand, driving up prices and therefore reducing the real impact of the changes,” added Andrew Montlake, managing director of mortgage broker Coreco.

In the longer term, the measures risk heavily dampening the market next year. Laura Suter, AJ Bell’s personal finance analyst, said transactions would likely “fall off a cliff” once the tax break ends.

David Westgate, CEO of Andrews Property Group, agreed a short-term boom could be followed by “softer prices” when the scheme ends. “Cliff-edge deadlines completely distort the market and rarely benefit the consumer."

‘Questionable’ boost to buyer demand

Some analysts were unconvinced the policy will even lift demand at all amid the worst economic crisis in decades.

“It’s questionable whether this will have the effect people think it will, given that economic uncertainty tends to temper the appetite of most people to make large-scale changes of this kind,” said Michael Hewson, chief analyst at CMC Markets.

Neil Wilson of Markets.com was even more sceptical, arguing it was “not going to make a substantial difference given households’ worries over job security and their finances.

The CEBR also noted a widely expected rise in unemployment and the end of mortgage payment holidays would put downward pressure on prices later this year.

Other analysts asked if the stamp duty relief lasted long enough to boost new home supply. “It gives little opportunity for house builders to use the reduction to inform strategic decisions on construction plans beyond the next nine months,” said Chris Denning, a partner at accountancy firm MHA MacIntyre Hudson.

Reforms ‘benefit homeowners most’

The government’s decision to focus on stamp duty rather than other housing measures also came in for criticism.

James Forrester, managing director of Barrows and Forrester, noted limited other measures to boost supply or affordability, calling them “more pressing” issues than demand.

Luke Murphy, associate director of the Institute of Public Policy Research (IPPR) think tank, said the measures would benefit existing homeowners most if it pushed up prices.

He said the reforms, alongside the government’s plans to deregulate planning, “will do nothing to deliver the high-quality, secure and affordable homes that the country needs.” The campaign group Generation Rent also said the move offered little to renters “whose incomes and savings have been destroyed by the pandemic.”

Meanwhile the biggest savings are likely in wealthier regions. The estate agent Barrow and Forrester has calculated how much average buyers will save in every local authority, and said Londoners would save £14,290 on the typical purchase.

READ MORE: What Rishi Sunak's summer statement means for you

“The tax relief will clearly benefit those in London and the south-east most, where house prices are higher and so the potential tax saving is greater,” said Suter. She noted even second- and third-home buyers and those buying multi-million pound properties would benefit.

“The average buyer in the north-east will see no gain from the holiday,” noted the Resolution Foundation.